Ruwani(or is it Ru) – I came across this news item about the budget. Apparently all government sector employees qualify for a loan worth Rs. one million at a four percent interest rate or the sum total of a five-year salary, whichever is less…. So what’s going on here, is this an attempt to boost the economy via consumer spending/demand ?

Hey ivap, Ruwani, ru, whatever I respond to both. Not sure what the loans scheme is about. I have a sneaky feeling it’s in response to the annual harangue that state-sector workers (government clerks etc..,) don’t get paid well, their salaries are not indexed, pensions are useless to cover the cost of living and that the private sector is enticing them with sparkly new jobs( I think). If this is the case then it’s high time because all of the public-sector (state, provincial and semi-government amount to about 910,000 employees. The loans at low interest rates are usually a good way of stimulating demand from a captive demographic I guess. Other issues are:
1. It’s a lot of cash to throw about considering inflationary pressures.
2. It will stimulate demand for housing construction as term-loans like this always do.
3. Is tied to a supply-side policy of improving human capital of this workforce and therefore is a reasonable initiative.
4. The money is better off as small-farmer subsidies.

hey ruwani,

Need a small clarification, how does issuing treasury bills erode the value of the rupee? (Unless you mean by that the govt. then spending the money it receives in an ad-hoc manner thereby being inflationary) Monetary policy was never my strong point:)

Also, i’m really curious to know what your answer to the “Myopic Economic policy” is..in that, if you were PB what would you do? I agree that lots of policy has been politically motivated and the usual evils of SL govt.s prevail, but is there a novel suggestion in your hands? For instance how could it create jobs and stimulate business whilst keeping inflation in check?

hey ddm, I’m no guru but I’ve studied a bit about development so that will be my second answer. I’m quite averse to monetary policy as well, but from what I know:

Issuing treasury bills is a way of initially raising cash for the government, first they sell bonds and T-bills on the open market so as to decrease money supply (reduces inflation) then they buy them back. The myopic policy in this sense, is that recently it’s become a lever that the treasury seems to pull whenever they feel like it and did all of last year and 2003. They buy the t-bills back at a time that is convenient for them, but not really worrying about how this will affect capital markets. Money supply SHOOTS up, more money in circulation => increasing inflation, value of the rupee declines.

I have no magical solutions, and anyone who’s studied economics or development for any length of time will tell you that only a fool is ever certain. But my first step would be coming up with a plan for development and rural poverty – At the Kandy Development forum that began yesterday, apart from the usual noise the government unveiled a plan to lift up 5 million people out of poverty: http://www.asia.news.yahoo.com/050515/kyodo/d8a3gj2o0.html. This is the most obvious start and its vital to become serious about the welfare of the rural populace who’s main source of income is agriculture. Absorbing some of the small farmers into larger corporations so as to make agro-production efficient is the first step. We have to be able to feed ourselves. Stats on agro production are very disheartening, because has been a sector that is ignored, inefficient and wasteful, we actually have less rice availability per person per year today than we did 40 years ago because Sri Lankan politics could not tap the potential of the Green Revolution.

Creating jobs means creating rural employment, it doesn’t necessarily mean large-scale industrialisation. I am an advocate of supply side policies for this reason: it attacks the problem at it’s root; make more people employable and create a mechanism to protect small farmers from international competition but make them more competitive, this has the added benefit of not pressuring prices. Development theories insist that this will stimulate growth, increase living standards and thereby push more people into urban employment as well. In India, agriculture PAID for most of the industrialisation that we’re seeing today.

This is only a small, first part of the plan, the dimensions are huge but I’m glad you asked.

ah right, so it’s buying back the treasury bills that is inflationary and not issuing them that is inflationary, thats fine. I agree 100% about the importance of rural development, the urban private sector is the engine of econ growth but the benefits are shared by a small sector of the population. But i sort of disagree with you about agriculture. I don’t agree with protectionism in agriculture as a long term solution (i have a feeling you’ll feel the same), Sri Lanka’s history of protection has been horrid, for instance our textile industry was protected for so long and it became so inefficient, poor quality and costly, but after liberalization there are a few textile mills that now produce competetive products.

Now i understand that agriculture is more than just a commodity, it is a matter of life and death for most rural ppl, so the price they receive needs to be stable and reasonable, but we need to shift our comparative advantages in the long run. Relative prices of agricultural goods in the international market will only continue to fall, also with increasingly disturbing weather patters farming is a very unstable way of earning a living. So we need more people in the services and light manufacturing industries. The most critical thing for this is education. It’s a very long term solution and even if our own private sector can’t absorb all of them, i’m convinced that outsourcing and other trade in services has to be SL’s next target in terms of international trade. Everyone thought all india’s IT whiz kids will be useless bc india’s private sector won’t invest, but along came outsourcing! So long term needs are investment in human and physical capital, viz. education and infrastructure. Our access to education is outstanding but the quality and content leaves a lot to be desired, but i think things are moving in the right direction for the moment.

But in the short run we need to help out our farmers, the idea about absorbing small holdings into larger groups makes sense, but not a lot of private sector firms are keen on agriculture as they don’t see it as a strong growth area. What we can do is invest in infrastructure so as to reduce transport costs and with better telecom infrastructure we can move towards perfect information. Again long term steps but it will reap rewards. hmm that all sounds quite up in the air doesn’t it..heh wish we had all the answers

Yes, you’re right, protectionism in this country has a history that’s has been accompanied by rationing, food coupons and adults in their 20s dying of oedema. The percentage of the workforce that is dependent on agriculture as a main source of income is 35%, their current share in GDP is 19%. A recent survey of the proportion of the urban workforce who claim agriculture as a secondary source of income is over 70%. Anyone wishing to target inequality should see this as the first place to start. People are tied to the earth and what a bloody fertile earth it is. Michael Ondaatje said:

“In the land of my birth, you can spit on the ground and something will grow.” (or something very close)

We have climatic conditions not unlike certain South-American nations, even though it is not as wet as the rainforest region, we have monsoons that can stun anyone who claims Sri Lanka to be a dry country. There was a study done recently by some agro-dudes who had some serious things to say about Sri Lankan agriculture and where they think it should go. Agriculture no longer has the stigma attached to it that makes it a giant loss-making engine, take the vineyards of Australia, California and South Africa, take the Soy-Bean fields in the Mid-Western States, take the vast acres of land devoted in India to growing Organic Citrus fruits and vegetables. The character of global consumption is changing, and with it, the character of the Sri Lankan traditional farmer should change as well. In Russia in the early 19th century, the serfs who used to work land for grain would always make sure to distill high-value vodka in a year of surplus. They did this to ease their own hardship during a bad harvest; they learned quickly the different grains and blends of distilling and perfected the art of this production so that within a few years they had learned the character of most of the Russian vodka market west of the Volga, they knew what the Czars liked to drink and they knew what would sell in the taverns of Petersburg. Their methods of distribution was simple enough and the faint exotic air of country-brewed vodka was a marketing line enough.

Sorry, returning to SL, we have failed to identify the growing markets for organic food produce, hell, farmers can’t even sell their own produce in the country because of the lack of efficient distributive networks. I believe that if we try our hand at it, educating and training farmers we can tap into the organic food industry, the large scale cocoa-bean industry and a variety of other products that have middle markets in the UK. We don’t really need mass markets, we need middling sized ones of high-end value. I literally bought a packet of organic cinnamon sticks the other day here at an organic food store (Made in Sri Lanka) for close to 5 pounds. that’s nearly Rs. 1000. So like the Russian farmers/vodka distillers we need to max out on the changing character of world food consumption, this is a very micro-level analysis but since we’re talking about a specific industry I thought it would help.

Helping farmers means educating them, like the Thai government – why not introduce a few related subjects into the rural curriculum so that we can weed all the pesticide-drinking hysterical small farmers from the ones who really have a passion for it, and make use of it. Also helping them sell their produce, can’t we tap into some of those overseas marketing distribution networks that the Tea and Spice industries have done?

You’ve touched on a point – education, economic policy here is myopic because it has next to nothing rates of return on investment in the short run, but massively high ones in the long run. So public investment is misdirected often into construction and defense procurement where it’s massively lucrative. I’m not sure about the outsourcing thing, you need a large base of english-speaking, well trained individuals with a work ethic which I don’t think we do – at least not in a large scale. I’ve already babbled on long enough, but this is a problem where certainly more debate is necessary, and more creativity is needed.

I like what you say about organic food markets, when i was in england i saw everyone buying standard veges for way more than the normal rate and thought shit we ought to be selling this. You’re right, agriculture in SL needs to evolve and there are niche markets that can be tapped. But I also think that whilst there is growth potential in agriculture that has been untapped, it is exceeded by growth potential in services in particular. More on services in a bit. So what i’d like to see is SL’s dependence on agriculture as an employment source diminish, and that whatever farmers are left be working on things like organic foods that you mentioned. As you mentioned if we weed out (forgive the pun) those farmers who are not really committed nor passionate, we will be left with a small number. Most ppl take up farming bc a lack of plausible alternatives given educational attainment.

If Vietnam and India can produce rice cheaper than us then we should buy it from them, and our farmers should either produce different crops or shift industries. This shift is where education is critical. Hopefully the farmer’s son won’t be ploughing the field at age 10, instead going to school and getting sorted. That is just my ideal situation, got to of course remember the difficulties in opening up agricultural markets (which i think should be done in the longer run and very gradually) are only too apparent even in developed countries as the difficulties in the Doha round would show. In the mean time as you rightly said we need to encourage newer markets in agriculture and support farmers in other ways (anything but monetary hand outs!).

Back to services as promised, as it stands we have very limited access to the world’s outsource market, but my point was that we need to target it. We already have an advantage over a lot of countries in that we have the educational hard infrastructure like free schools, what we need is soft infrastructure like better curricula (thats got to be spelt wrong!) skills like communication and reasoning power instead of the parrot style learn and regurgitate that we went through. So given some time (if the english medium reforms also go through) i think we have a good chance and need to continue on this path. But work ethic, big stumbling block..but given the right incentives a lot more ppl can be pushed a lot further. I think our views on SL work ethic are skewed due to the influence of the public sector, and incentives there are nearly non-existent. Crap i have to run off, this has been fun :)

p.s.
was that quote from anil’s ghost.? its so familiar

I like all of Ruwani’s points, but I still think Sri Lanka can’t get enough growth from Agriculture to really help the rural poor. I guess I still side with ddm on the services thing. To quote Rohan Samarajiva in LBO:

“The services sector employed 43 percent of the workforce and constituted 55 percent of the economy in 2003. In contrast, the agriculture sector employed 35 percent of the workforce though constituting only 19 percent of the economy and growing at only 1.5 percent, reinforcing Jagdish Bhagwati’s claim that “nowhere in the world has agriculture grown, on a sustained basis, at more than 4 percent annually . . . .”

“Investment and policy action must be focused on the services sector, which has the greatest potential for yielding double-digit growth for the economy and a reduction of the divide between Colombo and the regions. But without a clear appreciation of the logic of promoting services it is unlikely that the services sector will prosper. Pouring more resources, absent structural reforms, into agriculture as this government seems intent on doing can only be described as “gangata ini kapima,” a futile act akin to throwing valuable timber into a river.”

Tha also mentions the value of the niche agricultural markets that Ru points out. I think those are very important, but I think that they’re just that. Niche. Only services can really provide enough growth. People seem to have the impression that Services are for English-speaking Colombo elites, but it also includes jobs like housemaids. Even traditionally Colombo BPO type jobs can be profitably pushed out to the districts if the Grid is expanded.

Ru ,
I’m no economist.I might be wrong.No disrespect but
this is my two cents worth about the issue.Like Indi says “a niche is a niche”.The only small farmers who can survive in Sri Lanka are the tea small holders in south ,sabaragamuwa and hill country .That’s highly seasonal.For all other’s they have to do other stuff to survive .It’s a total family effort(Sons in Army,Daugters in Garment Factories and Wives in middle east etc..)

About going after organic food market:I live in a big US metropolitan area of 2-3 millions.We have 3 organic food super markets(compared to a lot of conventional supermarkets and grocery stores).Although it’s influenace has been growing ,the prices are highly prohibitive for an average family here.Also type of foods which has the biggest sales might not be the ones we can grow.

What if my father has a plot of land (paddy)which is less than an acre ,which is the average size for a small farmers in Sri Lanka.Let’s say the family size is four and it’s the only source of income.How can we surive?If we move in the new direction what kind of crops we should focus on?What kind of agri-business we canform(the markets etc..)?What will be our income(and also size of farms) compared to other small farmers in countries like US,UK,France ,Japan? (you should aim for the stars!The small farmers here are also feeling the crunch from big corporations .).If we go into organic food growing, would we be able to visit our markets(US,UK,etc..)or would be able to afford our own products over there with our income?What’s preventing other third world countries from going after the same thing and saturating the market.

I have also heard a lot about Thai Agri Business success.Since the climate is almost like our’s I’m really curious about it.
I know our attitude is bad ,English is poor and infrasture is pathetic but if we have a bunch of creative people on top we can certainly turns things around.

The other side of the coin is fishing.World’s oceans has been over fished according to some studies and we are seeing the effects .I think even Sri Lankan fisherman can attest to that.
Agriculture and Fishing should always play a role but without investing a lot in Science and technolgy others will always beat us.We will end up being consumers of their products(fertilizer,machinary,new kind of seeds,boats,nets, etc..) will never be able move up the ladde.

This isn’t a subject reserved for economists and everyone’s two cents are worth debating I think. (I’m slightly wine-ful, hope noone minds)

ddm : the quote is from Anil’s Ghost. I agree with both you and indi’s points about the higher value of the services sector in improving growth momentum, but I don’t think that it’s the best solution for the rural sector. Agriculture v. industry/services, traditional v. modern, estate sector v. small farmers are the development paths that are available to us, and the long-standing debate among development economists.

What we face in Sri Lanka is a dual economy with respect to agriculture – we have a high productivity plantations sector that contrasts dramatically with the small-holding farmer and the two are hardly inter-linked. The traditional farmer has been a) too stupidly entrenched in primitive farming techniques to learn from the estates sector and none of the competitive discipline that comes from being globally dominant in tea production has spilled over to the traditional sector, and b) has been wilfully excluded from foreign loans and strategies aimed at developing this traditional resource. The traditional farmer is like the plantation sector’s poor cousin in this respect.

The reason that I believe that improvements in niche organic food markets can go a long way in relieving the poverty of the rural populace is the very existence of this smarter, better informed, better connected cousin. We’ve done it in one sector and Chandare I have to disagree with you in this respect we have the resources to do it again. It’s popularly believed that Sri Lankan paddy production is inefficient and yields are low, this is a myth. A close comparison with India, Indonesia, Madagascar, Myanmar, Pakistan, the Phillipines and Thailand show that Sri Lanka had the 2nd highest yield per acre ( Indonesia came out on top, this was attributed to longer day lengths and climatic zone differentials) – See CB report 2003, p 87. The problem is noone wants our rice: our two staples are kekulu and samba and there is hardly any global demand for this (in fact i’ve only come across red-rice at one Hungarian restaurant in London and it was 3x as expensive as the basmati or the risotto). The second and more domestically relevant problem is that our rice production is highly wasteful. For every bumper harvest, we have about 15-30% waste that is produced alongside with it. This points to the fact that along with the unique character of rice production, poor harvesting methods and processing make it a highly inefficient staple to be hooked on.

Chandare in response to what sort of substitutes your family farm can produce – I can quote some people who’ve done some splendid research on the subject: Cocoa-beans, cardomom (e.g in the Knuckles Mountain Ranges), Cinnamon, Peppercorn, basically all manner of spices are suited to our weather, so are certain tropical fruits and veges. Finding a substitute cash-crop isn’t the problem, it’s a) Training the farmers in the vagaries of the harvesting and production process and b). Guaranteeing that the farmer will be able to sell his/her produce either domestically or abroad where it will fetch greater revenue.

About the services sector – though I agree with the ddm & indi’s points there are more subtleties to the development question that make a whole-sale drive towards the services an issue. First, the number quoted in the article includes Wholesale retail, textiles, tourism and all other manner of commercial services provided, more often than not, the outstanding experience that individuals receive in the services sector serves as a leaping point into the more lucrative middle-eastern, far eastern and meditteranean markets (Most SL chefs end up working in 7 star hotels in Dubai etc..,). The most successful development theories always focus on the spillage of the rural sector into the modern sector, where the modern sector entices the surplus rural populace with higher wages, what’s happening currently is that wages in the services sector are levelling out and demand for house-maids in the Middle-East is declining, with the influx of Indonesian housemaids (who are Muslims, speak Arabic and often far more skilled in household activities) and also with the volatile immigration policies of GCC nations. What we need if we’re to enlarge the available workforce to the services sector as ddm pointed out is a real drive to improve the human capital of the rural workforce – like taiwan, we have to have a ready pool of skilled & trained labour available to manufacturing and services, not the current vast amounts of unskilled labour that is being churned out to serve as house-maids or petty workers in Colombo.

Which development route to take – services or agriculture are not fundamentally opposed as you might think, improving the standards of living through improved agro-productivity, means more money and greater participation in markets in the rural sector, which in turn re-inforces demand for local services (e.g. A woman working in the annual harvest may ‘outsource’ some of her household activities to a neighbour like childcare services, cooking, other activities) and thereby increases the human capital of the workforce since education is highly income-elastic and this provides a reasonable pool for industry and services to exploit.

Ru ,
I think my prejudices keeps me from seeing value of the agricluture based economic revival you mentioned.
I have seen the lifestyles of farmers of several countries.Also I have spent time in knuckles range with farmers who illegaly grow cardomom underneath the protected forrest cover.I know they fetch high prices(Sri Lankan standards) but I have seen the hard life they live.
How can our farmers get the same comparable amount of income and life style is beyond my imagination looking at the resources availbale to them.See I want a small farmer in Ambilipitya to afford three square meals,money for enterainment ,a family vehicle,send their kids to college , have some savings for retiremnt and once in a while take a vacation preferbaly outside the country.I know I’m dreaming but looking at the farm size I don’t think they can make it no matter how productive they are.

My prejudice is this , ,when I hear somebody saying that we should keep our focus on small farms and agri-business ,what I really hear is you guys outside Colombo should better keep toiling in the lands and while we the elite will have better things in life.President Premadasa understood this and tried to relocate a lot of garment factories to rural areas as a start.

Sri Lanka began to feel the pressure for land way back in 1930-40′s.Although it has taken backseat to langauge and descrimination issues in the news papers ,that’s the real root cause of our civil war(Ealam,71 and 87-90 ).Although our population growth is under control ,over the time the size of our average farm is going to go down.

If Taiwan can have a ready pool of skilled & trained labour available to manufacturing and services why can’t we?
I don’t have anything against agriculture but for chrissake how hard it can be to get
1)several highways built
2) Reliable power supply
and
3)30% tertiary education with English (University,vocational and technical ect..)

Also check this article about spice farmers in Kerala

I have been trying to find the average farm size in Sri Lanka on the web without sucess .What is the actual size?
I found two links one saying less than 2 acres and the other saying less than a hectare.Both of them seems to be old data.
THE SIZE DOESN’T MATTER??? ;-))
I found this about USA and this about Europe.Somewhere it said in indonesia it 0.5 hectares.
How the hell are we supposed compete with that scale and have a comparable income?

Average Farm Size: Department of Census and Statistic, Agricultural Survey 2002.

Non-Plantation Holding size:
Holdings less that 40 perches (<0.8 of an acre) mainly for home consumption = 45%, Cultivated on < 5% of land by area.
Small-Holdings greater than 40 perches mainly for sale purposes (upto 20 hectares) = 54.5%, Cultivated on 75% of land.
Estate Sector greater than 20 hectares = 0.1%, Cultivated on > 20% of land by area.

Size doesn’t matter initially, it’s yield per acre that matters i.e. efficiency, you can have a really efficient farm at about 2 hectares. As it turns into a fully flegded cash crop then acreage becomes important.

In answer to your previous question about how difficult it can be to build highways, improve infrastructure etc.., You’d be surprised dude, it’s near impossible in a country like SL. And yes, I want farmers to have the same standards of living as industrial workers too.

Ruwani, don’t economies of scale come into play with fragmented small holder farms vs larger scale operations ? I have some anecdotal observations, living as I do in a rural area. Farming country, basically.

a. the risk of crop failure from localized conditions is much greater with a small farm. They can’t decide not to till a field in a particular season for some reason and still expect to turn a profit.

b. the amount of economic influence that a small holding farm has is negligible. The operations here can afford to act like Walmart in negotiating with suppliers, their turnover per year is sufficient that they can afford machinery to do most things (goddamn, heated and with CD players in the compartments too.)

and well, with niche crops, don’t you think that distribution, marketing and packaging play as big (if not a larger) role in the success of a product ? Our distribution infrastructure from all but the established areas (ie: Nuwara Eliya for veggies and so on) isn’t very good. There is no established procedure for sale (such as the tea auctions). Isn’t that the key differentiator between the small holder farm produce vs the plantations ? They have an established process and means for selling their product.

I’d probably back a service oriented industry myself if it weren’t for the fact that if we bet on the wrong horse, there might be lots of software engineers or civil engineers (or whatever) looking for jobs that aren’t there.

And to round off what are random observations, farmers in Europe live like fricking kings. Part (or most) due to the generous government subsidies, but it’s certainly no stigma to call oneself a farmer in Europe :)

Thimal, economies of scale do come into play eventually but for niche crops high yield per acre often takes a back seat to quality of produce. And high-quality niche crops that fetch large revenues are mostly what I’m advocating here. And yes, we can learn from the Colombo tea auction and the system of brokers and middle-men that go into selling Sri Lankan tea.

You pointed out the issues of farming in a developing country – production risk, this can be alleviated with a greater equality in land distribution and some sort of insurance mechanism or safety net for the farmers. It’s the distributive and marketing economies of scale that matter – e.g. Namunukala plantations has quite a few small farmers producing and selling exclusively to them, the surplus is sold domestically through the farmer’s own distributive network. So eventually we can have a grid(if you will) of small farmers of more efficient farm size selling to a few large corporations which put in the transport, communications, finance, distributing, processing, packaging and marketing experience. I agree that farm size is too small at the moment which dampens individual negotiating power.

The services sector needs to be able to extract a supply of skilled labour from the rural areas. For this we need to:

a. Dramatically improve rural education in terms of accessibility, quality and future employability of students, to improve labour mobility.

b. Improve basic infrastructure – roads, utilities, telecommunications networks, to improve geographical mobility.

c. Specifically in the case of Sri Lanka, services has to offer more competitive wages and benefits to the rural worker than comparative earning opportunities abroad(more difficult).

My stance on improving agricultural productivity and diversification stems from a desire to see a move from the heavy dependence of the three-pronged export cash-crop to a more balanced agro-export industry. It also comes from the (possibly deluded) confidence that the gap between the technical progres of the plantations sector and the traditional farming sector can be narrowed more easily than the fully-fledged drive towards services, which opens up a skilled labour force to compete with the likes of the giant Indian services market and requires a complete structural shift in terms of industrial resource utilisation.

Farmers in Europe are a bit of a bad example, I was thinking more of Chinese, Indian and American Farmers who eventually push out their progeny into the services sector and create more participation in rural markets and have experienced enormous increases in standards of living.

Just to throw in a few whacky and crazy ideas

1)What do you think of Expanding the defence manufacturering industry into a niche supplier (similar to the Singapore arms indusry)?

2) I haven’t seen any discussion about R&D driven development. What can we expect in the near future in regards to R&D based activity/industries?

ivap, the problem (as I see it) with R&D is the investment in capital and research facilities required, the huge number of qualified technical personnel with experience in research required and the possibility that most of the blue sky research will not produce a yield.

Put it this way, R&D is like a venture capitalist. They expect that only 10% of their projects will succeed, and thus, they expect returns on that 10% to cover the 90% of projects that didn’t :) I see a place for us in applied technical research, but in the short and medium term, I think there is more benefit in concentrating on good ROI rather than producing innovative research at the moment. Because umm, err.. we need the hard currency. To draw a parallel, the Taiwanese semi conductor industry makes huge profits from licensing designs from other companies and producing products cheaply. But now, and only now, you also see some excellent original products (as a result of R&D) coming in from those areas too. Make enough money to expand an industry before focusing on R&D, I’d say.

A possible exception to this might be IT, because (from what I see) the cost of entry into R&D isn’t as high as say … a manufacturing R&D unit. I think some research is already being done, but growth in infrastructure is very slow and that’s a bit of a hindrance (not exceedingly so). For points of reference: we have power problems and we also have a slightly limited (lower QoS) pipe from SL to anywhere; both of which are slight hindrances to an IT industry that really wants to compete with outside markets. I won’t even go into the odd anchor dropping which severs our undersea link to anywhere and throws the entire country’s internet infrastructure into a panic :)

For defence, well.. another example I can think of might be the South Africans (or maybe the Israelis). Do we have the technical expertise for this yet ? I dont know, but I’d suspect not.

hi there ruwani and ddm

I came across this question from ddm to ruwani and thought i would add my two cents worth.

(Need a small clarification, how does issuing treasury bills erode the value of the rupee? (Unless you mean by that the govt. then spending the money it receives in an ad-hoc manner thereby being inflationary) Monetary policy was never my strong point:)

This is how it erodes the value of the rupee. Issuing treasury bills to people itself does not erode value of the rupee. The problem happens when treasury bills are issued to the Central Bank. Central Bank then has to literally print money to buy them.

If people bought t-bills, they would buy them from their savings earned from real economic activity. They would give it to the government and they would not spend it. Government would spend it on their behalf. Net effect on aggregate demand? Almost zero.

On the other hand, if Central Bank buys bills from printed money, that creates new money/ demand in the economy. There is no economic activity to back it (production) , so prices have to go up. When you print 65 bn in the space of say six or seven months, which is what happened in 2004, the effect is devastating. That is 3 per cent of GDP.

So domestic inflation rises. In other words the real value of the rupee falls inside the country. Also look at where the printed money ends up. If there is no production to back it, the goods could be imported.

If the government uses the printed money to subsidize imported things, say oil, fertilizer and such stuff, it has to convert the rupees to dollars to pay for the subsidy.

Of course this puts pressure on the forex markets and the dollar/rupee value falls. So the external value of the rupee goes for a six.

Or Central Bank has to give from its foreign reserves to cover the import bills, and hold the external value. In practice both happens, depending on how much reserves Central Bank is willing to give away. In 2004, reserves fell and the rupee also fell.

So you if print enough money, a balance of payments crisis/rapid depreciation is almost inevitable. Rapid depreciation causes another bout of inflation. The rupee is er.. .screwed from both ends, to put it shortly. Also when the subsidy is ultimately lifted (fuel prices raised for example) you get hit by another bout of inflation.

Surprisingly enough, Central Bank has actually explained this in page 14 of its 142 page annual report that you guys/gals and fuss-budget are having so much fun tearing to pieces.

If you have enough dollar reserves (or inflows), you can hold the external value for a while. Then your currency gets overvalued and exports fall and then you have another balance of payments crisis and the rupee falls anyway.

After the tsunami the rupee strengthened and this is what happening now.

Central Bank credit or printing money is the last resort of desperate economic mis-managers. It makes everyone poor.

ab

Yeah AB, that sounds about right. heh the comment someone made about us pushing military hardware and being a niche supplier was quite novel. The problem is we don’t even produce our own weapons, (other than the batta mines which i hear are not very pleasant to step on), we import our stuff from China, Pakistan and those bloody antanovs from Russia which have most probably spent their years between being crop sprayers in summer and languishing through the siberian winters.

Exactly ddm. On the subject of aircraft the last time LTTE brought a couple of micro-lights (at about US $ 300 a kit I am sure) we spent US $ 200 million on anti aircraft defences and contributed to the balance of payment crisis in 1999. lol

This time they have gone a step better and got two light aircraft. Some of our newspapers have started to make a noise, so has india. I am sure they will start flogging another bunch of anti-aircraft stuff or some supersonic fighters so that we will have another balance of payments crisis and lots of poeple will make bunches of money.

This is the way to fight wars.

I have been posing a simple question to a number of people: what is the short to medium term upside that you see in (a) the economy and (b) the political situation in Sri Lanka?

So far, the only answers have been a blank stare, followed by a suggestion that IF this government falls, THEN, perhaps there might be some hope.

So far, the ‘new’ government has already squandered a year in office and their attention has largely been focused on simply trying to remain in office. Such minor problems as the economy and peacce must naturally take a back seat when one is, like the Lion and the Unicorn from the nursery rhyme, fighting for the crown.

The President sees only one problem: to change the constitution so that she can remain in power. The JVP sees many problem but offers only one solution: North Korean communism in the style of the Great Leader.

We are now well advanced on the march towards what I call NBR status, a description of which is given below.

Successive government worthies on this sunny isle have at various times, sometimes entirely unprovoked, claimed to have set our country on the path to NIC (newly industrialised country) status. We reliably learn that we have now achieved NBR status which, we are assured, is on the road to NIC status.

In honour of this great achievement Sri Lanka’s National Flower, the Blue Water Lily (Nymphaea stellata) known locally as the ‘Nil Manel’ is to be changed to the Plantain Flower (kehel Mala) .

NBR status is New Banana Republic

This must not be (heaven forbid) confused with ‘Banana republic; (or Bananaland or for that matter trousers made by some idiotic American company) which is a pejorative term for describing a country with a non-democratic or unstable government, especially where there is widespread political corruption and strong foreign influence. It is most often applied to small countries in Central America or the Caribbean.

Sri Lanka is in the Indian Ocean and, thanks to the JVP, quite safe from such evil foreign influences that plague the mid Atlantic.

The original ‘banana republic’ was Honduras, where the United Fruit and Standard Fruit companies dominated the country’s key banana export sector and support sectors such as railways. The United Fruit Company was nicknamed ‘The Octopus’, for its willingness to involve itself in politics, sometimes violently. For example, in 1910 the company hired a gang of armed toughs from New Orleans to install a new president when the incumbent failed to grant the company tax breaks. The newly installed Honduran president waived the company’s taxes for the next 25 years. The company’s dominance in Honduras, as well as other Central American countries like Guatemala, led Pablo Neruda to write a poem titled La United Fruit Co. in Spanish.

In Sri Lanka, thanks to state policies, the evil English and Scotch Tea companies were driven out, thereby preventing the calamity that occurred in Honduras and leaving its place the glorious JEDB and SLSPC.

In modern usage the term has come to be used to describe a generally unstable or “backward” dictatorial regime, especially one where elections are often fraudulent and corruption is rife.

In Sri Lanka we have elections at the drop of a hat, (or sari potta as the case may be) so democracy must be working well.

The foreign influence may well be more political (for example through corruption in the elite, or military support for a dictator) than economic dominance of key sectors. The term no longer implies that the foreign influence is a corporation; it could well be a foreign government, in which case the relationship can resemble a colonial one.

In Sri Lanka, as everyone who reads the state press knows, there is no corruption, especially of politicians and their cronies.

By extension, the word is occasionally applied to governments where a strong leader hands out appointments, advantages, etc. to friends and supporters, without much consideration for the law.

Again, transparency, the rule of law and good governance are the order of the day, The Chief Justice says so and who are we to disagree?

In literature, San Theodoros and Nuevo Rico are fictional South American banana republics in the world of Tintin that display all the stereotypes one might expect of such countries. For instance, San Theodoros is constantly limping from revolution to revolution (often fuelled by outside agents); and when Tintin first lands in San Theodoros, he immediately gets bestowed the rank of colonel in the army, leading to a protest of one of the many other colonels, because there are only ten corporals in the army. One of the main contenders, General Tapioca, is supported by some outside power based on Stalin’s USSR; the other one, General Alcazar, is supported by the “United Banana Co.”.

Joseph Conrad’s 1904 novel Nostromo is set in Costaguana, another fictional South American banana republic, which is also heavily prone to revolution. Much political power is held by a foreign mining company.

But then, literature is literature and art is art. There is no possibility of life imitating art….

Hey Jack how does the latest idea of legislating private sector wages fit into the NBR model? Any ideas Ruwani? Isn’t this another smart move to boost inflation?
Not that i would say no to a wage hike, myself being a private sector worker.

Louis de Bernieres (Captain Corelli’s Mandolin) wrote a few side-splitting and superbly satirical (I am an alliteration-whore) novels about banana republics : ‘The War of Don Emmanuel’s Nether parts’, ‘Senor Vivor and the Coca Lord’ and one of my personal favourites – ‘The Troublesome Offspring of Cardinal Guzman’, it’s bizarre, but Latin American countries, even though they face extreme, chaotic and corrupt economic situations have to date produced some of the world’s leading economists. According to de Bernieres (who is not an economist, but a gifted writer), the private sector which consists of leading Politicos private interests are paid well at the level of top-tier management.

Like the original Banana Republics of Latin America, American pioneers like Minor Keith (the railroad mogul who became UFCO’s redoubtable heir) or George Jung (The now incarcerated cocaine king) are elevated to an emperor-like status by South American right-wing dictators. The rise of American Conglomerates closely mirrors the rise of dictatorship and fascism in Latin America. Even though Sri Lanka has few similarities with the traditional banana republic model e.g an absence of one powerful and well-cushioned conglomerate that advances menacingly upon the entire economy, and a dependence on more than one export, like ab says there’s the aspect of favoured economic and military positions being handed around to those close to the top.

The NBR model is simply another neo-liberal or conservative experiment conducted by the US on certain countries like Nicaragua; feckless and incompetent regimes are installed and the US is the ventriloquist. Again far from the Sri Lankan model. NBR’s are poor imitations of democracy if you will, but are pushed towards open markets quickly with devastating consequences.

Where the great economic powers like the US protected and fostered its agro-sector, developing economies will have carrots dangled before them in the form of IMF or WB aid in return for open market policies, hence crippling poverty and corruption in West African nations and some parts of Asia. Legislating private sector wages is a touchy subject with clever people like Joseph Stiglitz(Nobel Laureate and Author of ‘Globalisation and it’s Discontents’)- it is however compatible with policies of privatisation and government sector cutbacks that the IMF has been trumpeting for oh, decades now. Very inflationary as you rightly say but foolish because if it’s not accompanied by tax relief for the same sector it is sure to exacerbate lay-offs and the like. Have not really been up-to-date on the subject, but will get back to you.

Minimum wage increases, especially dictated by legislation, are highly undesirable and may be unenforceable. How is this going to be monitored and by whom? More so, if this means tangling with the dreaded beaureacracy.

We need simplification of the existing labour legislation, not further complication. If anyone wants first hand experience of this, go through the sets of forms that need to be filled and returned by companies for EPF/ETF. Then go to the labour department and try claiming what is due. It took me about a month to get my payment and that too because I got hold of a fellow in the department. (He was the nephew of a junior staff member in the department.) He told me that they had lost one of my files (the reason for the hold-up)but he had done something (don’t ask me what, I have’nt the foggiest notion!)to ‘recreate’ the missing records.

Even better, go to the inland revenue department and try paying your taxes. I was sent from pillar to post and ulimately had to get hold of a tax consultant to get the job done (since I did not ant to waste more than ONE MORNING on the bloody job)

When wages in the plantation industry were increased to Rs.180/per day (from Rs.140) all investment in the sector was put on hold.

SL labour laws have historically been far too rigid. The TEWA since 1971 or something was the biggest curse. Thankfully it was reformed to an extent sometime in 2003 but still the costs of firing workers in SL are particularly high. TEWA and very messed up state sector hiring schemes are a major major contributer to unemployment in SL, and this wage thing is i think just as evil. Whilst TEWA and compensation laws increase cost of firing workers, wage legislation will increase cost of hiring workers. I think this govt. is trying to take the whole “anti-neoliberalism” business much too far.

I agree with Jack Point, it’ll just curb private sector investment. And when taht happens there is unemployment, and then the state intervenes and hires ppl wholesale and the cycle continues.

The problem with state sector hiring is that state jobs are permanant ones, basically if you get in you’re set for life. Now actual wages aren’t massive, but the job is fairly chill, get lots of O/T and social status is still good. All of these are very important to Sri Lankans, and so they are willing to wait for state sector jobs to open up as a result there’s a lot of frictional unemployment in SL. Furthermore the govt. plays into their hands bc as soon as unemployment is too high (or an election is fairly close) they absorb workers into the state sector. In fact in last years major 40k hiring scheme a lot of ppl who worked in the pvt. sector left their jobs to get state sector jobs.

So given successive SL govt.’s record in terms of the labour market, any further regulation is just bad news. I mean an extent of regulation is important to prevent exploitation, but our labour laws have been ridiculous.

Ruwani, i’m not sure if private sector wage legislation is compatible with “privatisation and government sector cutbacks that the IMF has been trumpeting”. At least in a Sri Lankan context. One way of looking at it is –
Pvt. Sector wage legislation = lower pvt. sector job creation (ok now this is not entirely necessary but it’s likely) = unemployment = govt. sector absorption.

Also – what do you’ll think about the state sector wage hike? it’s been an iffy thing for me bc its obvious that state sector salaries are too low, teachers used to get 6-8 grand a month. But is the answer just increasing nominal wages? obvious inflationary implication, but then what should have been done? My guess would be some degree of incentive based payment but again that would require mass restructuring of state sector employment laws.

Ruawni says

“e.g an absence of one powerful and well-cushioned conglomerate that advances menacingly upon the entire economy”

I believe we have one in the making.

Harry J controls

Lanka Milk Foods, Distilleries, Aitken Spence, Sri Lanka Insurance

and has significant influence over

HNB, Commercial Bank and DFCC. (in addition to his unlisted Stassen group)

He is also a special advisor to the president and is believed to be targetting Hayleys. A ruthless tycoon who will transfer value into the unlisted companies owned wholly by him at the expense of minority shareholders in the listed companies. (eg by getting cheap loans from HNB and other banks where he has influence)

There is also a question of customs penalties and fines which have seem to have been waivesd since he became special advisor. (I may be wrong here, chk the Sunday Leader)

It is not for nothing that he is known as Dirty Harry. (I am yet to forgive him for hounding poor Michael Mack via the SEC.)

Who’s the Ceylinco dude? It was him I thought of and dismissed as I wrote that sentence. Lalith Kotalewela? There’s something fishy about someone who’s got a finger in insurance and medical services simultaneously? Capitalism in the West is traditionally suspicious of tycoons who have mastered the art of the Finger-in-all-pies-Multi-Prod, but we welcome it in our part of the world. What say you?

He’s a harmless nutcase, not really interested in money and has a fairly left of centre opinions. (Got blackballed at the golf club for encouraging the caddies to unionise) Many of the companies in the group are in a shambolic state, its a house of cards really, except for insurance and Seylan Bank.

He runs his companies primarily for the benefit of his employees, not shareholders, hence the so-called ‘Ceylinco-discount’ that applies to the quoted companies. (They are mostly on lower P/E’s than the sector and tend to underperform the market.) He is surrounded by a lot of sharks (amongst his employees) who are taking him to the cleaners but he does’nt seem to know or care but beware of doing business with his ‘sharks’.

Going back a bit to some of the other topics on this forum, I am trying my hand at organic farming, so far no return. The problems I have faced are:

1. High cost of certification. Produce cannot be sold without proper certification. Most certifying bodies charge US$300-US$400 per day to carrout the initial certification. When you ask them for how long the process is going to take they tell you that it depends on circumstances, which is very worrying considering the extra cost that a mere 2 or 3 day overrun can cause. I have been told that I need to budget Rs.300k, but I’m not going to talk to the guys until I can afford to spend at least Rs.500k-just in case of cost overruns.
2. No significant local market exists for produce and getting export buyers, especially for small quantities is very difficult. In the case of tea (which is what I do) the prices paid at auctions have dropped so that (one you factor the lower productivity of organic fields) the margins are not attractive. I know one estate that moved from organic black to organic green (where prices are better). We did find one buyer who was very happy with quality but we could not produce the quantities.

The only really succesful guy in the field seems to be Lanka Organics.

We are trying to work with a few other growers to club together and sell but it is not that easy.

I have found ready buyers for vegetables (inorganic) but it is impossible to find regular supplies. They want a contaner or two every week and sourcing steady supplies from hundreds of smallholders with Sri Lanka’s chaotic logistics is a nightmare. Even Cargills, which is fairly well organised in its supplies has a great deal of difficult in ensuring consistent supplies at a standard quality.

Ruwani,
JP is exhibit A.
If JP cannot do it how the hell non-blog reading ,non-english speaking,one-acre farmer haramanis apphuhamy is supposed enter the global miracle of super-oragnic farming ?

JP and Ruwani,

Harry J’s latest move is to make a bid for Lanka Bell. I think his critics are just jealous. Though transfers to unlisted firms may be going on, Distilleries shareholders have not exactly lost out.

Such people are needed to make markets work. He certainly creates a shake up in the system

Micheal Mack’s story is of course unfortunate.

Chandare I didn’t say that everygoddamn pesticide drinking loonie is automatically eligible to produce high quality organic, I said we have the resources but as JP pointed out we’re low on the infrastructure.

JP, sorry to mull on a point but how is Kotelawela surviving? I noticed his strong eye for diversification in the late nineties / early noughties with Ceylinco and seemed to be everywhere at once during our high-growth years. I get the slightly leftist tendencies but surely that too gives him some political muscle? He seems a bit of a cunning fox under the guise of a merry old soul / clumsy academic.

ddm I was thinking of supply side labour effects with the wage legislation (which I am against too), I should think that with wages and contracts being as sticky as they are in SL that there would be an upsurge in Pvt sector labour but of course investment would come to a grinding halt as you correctly pointed out.

Am a tad out of touch with the HJ situation so correct me if I’m wrong but it all seems quite common to SL – a few high net worth individuals who can really shake things up, forge a major investment and acquisition drive during a high growth period then fade away lining fat pockets after being knighted a ‘Deshamanya’ or a ‘Deshapriya’.

JP : On your point about the vegetables,

I have to pay an arm and a leg in OZ to buy what’s termed “asian” vegetables. Most of them are imported from south-east asia and available in “asian” stores (read chineseish). As ddm said, these are the standard vegetables available in SL and they are not “organically certified”.

I’ve always wondered why more of the Tea Estate land isn’t used for growing vegetables and why large scale vegetable suppliers have not sprung up in SL (correct me if I’m wrong). It seems to be run mostly by small scale farmers. As you say there appears to be good demand from within and outside of the country for such produce.

Another query I have is, why the tea estates aren’t used for tourism. A lot of the hills in an estate are ripe for a retreats / bungalows for the weekend Colombo crowd as well as tourists. Isn’t it a cash cow waiting to be milked? A bonus would be that it provides the estate workers with different employment options.

A while back someone I know looked into importing “papaya” from SL and the biggest problems were 1) Post Harvest Treatment (PHT) facilities, and 2) Maintaining a good ambient transit temperature to ensure the freshness. According to him someone could make a killing ($$ wise) by starting a PHT service for the export sector. The problem was the upfront capital layout. Is this still an issue?

Ru/ddm/ab : My naïve understanding of the issues suggests that by diversifying into multiple crops (i.e. not just tea ) and tourism an estate would have a more dependable pipeline as well and a better ROI. Is this reasonable?

Hey Ivap,

Tea estates and tourism sounds good. Veges in estates? not so good. Thing is SL isn’t competitive in producing up country vegetables, other countries make it for cheaper. So our comparative advantage in up country agriculture is in tea, so its best to produce maximum tea, sell it and then buy more vegetables than we could have grown from elsewhere.

So say price of 1 unit of tea = price of 1 unit veges.. We split the estate into 50% tea and 50% veges, say the yield is then 75 units of tea and 50 units of veges (bc we’re better at producing tea) which we consume. Now instead if we use the whole estate to produce tea we get 150 units of tea, and we can trade 50 units of tea for 50 units of veges from abroad. We now have 100 units of tea and 50 units of veges, which is 25 units surplus compared to the first example. So we’re richer! yay!

of course there are enough simplifying assumptions to negate that in reality, but you get the picture.

ivap some privatized plantations tried out veggies, green houses, drip irrigation the lot. However they did not take off in a big way. one even had a shop in Colombo.
But none of them really put lots of land on this.
whether this is due to economics or not having tried hard enough i do not know. The plantations are not terribly efficient as you know. Even in tea the yields of small holders are higher than most plantations companies.
So may be they cannot compete with small veggie farmers. But some were growing exotic stuff like bell peppers and so on as well which are sold to hotels, supermarkets.
One plantation tried growing rambutans. if i remember returns there were pretty good but not too sure.
The best example of tourism is The Tea Factory -Aitken Spence now HJ:) – .
JP and Ruwani, on the subject of HJ and plantations I guess he now not only controls the original plantations (Balangada etc) that he first got but also the SPENCE ones.

Oops, did not have time to check this morning, a lot seems to have been said.

Ok, on Kotalawala, he inherited a great deal of money. He lived a the good life of the well to-do playboy until the death of his uncle or father (can’t remember which) and he found himself having to run a small empire. He was never in need of money and is not interested in accumulating more. He’s in business for the thrill of it, not really for money. He has no children and all the money he will ever need so money was never a driving force. He does have an ego but stimulation comes from more from his charity work and his employees who tend to fawn on him.

The diversification drive is driven by employees who are tring to build their own empire within an empire so to speak. No man who is interested in making money will run multiple, competing businesses. There are half a dozen finance companies, a saving bank, a devleopment bank as well as a commercial bank who tend to compete with one another. There are two money brokers and half a dozen rael estate companies. If you want to sell land call two different companies from within the same group and watch the fun. They will keep outbidding each other! ( a friend of mine did just this an ended up with an excellent price).

A coupel of decades ago there was a small elite that had a great deal of influence. These were drawn from a particular social class. Things have changed, in that its is now all ‘new money’, the old elite have (by and large) migrated and in anycase a lot of their wealth was in land and other illiquid forms.

The new money is all in liquid cash and comes from dealmaking, particularly with the government. The old elite tended to be discreet, now it is a case of flashing money

The real rot started in the late eighties and has been getting worse by the day. Government corruption particularly in arms contracts (the biggest single item of government expenditure is on defence) has made a lot of people very very rich. The rot has spread to other sectors of government and the private sector. Purchasing managers in the private sector skim off commissions/bribes as a matter of routine.

I once had to pay a private sector building contractor a couple of millions (in cash) at the behest of the private comapny that I was working for. I went (along with another person to act as a witness) and handed the money to the man’s private secretary. Sge asked me to put the money down on her table. She did not bother to count, she could not possibly count for the entire table (about 8 feet by 3 feet) was covered with piles of cash left by other people.

A good way to guague just how far things have fallen is to chat to old members of the Ceylon Civil Service (there are a few still around and they have an association that meets every so often) and then compare the impression that these intelligent, articulate, well read beings almost all of whom will have something original to say with the morons managing the same government departments now.

It is not only that the standards of the past have lost, the saddest part is that they have now even been forgotten.

I think the problem with vegetables is that they are a lot more sensitive and a lot harder work. A tea bush is pretty hardy, once it is up it will yield with very little maintenance. Tea is all rain fed and in the dry season, although output drops, prices increase as quality increases. (It is very similar to vines, when the bush is under stress the roots go pretty deep looking for water and it is the minerals that they absorb at this time that give sit the flavour.) I think this is also why our pawpas, mangoes and plantains taste a lot better that the farmed stuff available in Europe – via the Caribbean. They water the plats too much and the fruit also tastes pretty watery.

Vegetables need watering, careful tendering and need to be dug up/replanted every week and heaven help youu if the bloody wild pig or bandicoot discovers your precious crop. Transport and handling is also very tricky particularly for things like tomatos. Tea is just dumped into sacks.

Tea estates and tourism is just a case of marketing, i think. Dilmah has just started something called ‘tea Trails’ believe Confifi is eyeing the same market.

The thing is that the accomodation (tea estate bungalows) is small-it needs to be, no point building massive great concrete blocks in the middle of a tea estate (to cater to the mass market-the bulk of our tourism)and spoiling the view so the only way to get decent revenue is by going upmarket (US$80+ per room). There is fairly well developed boutique hotel market on the coast, this traffic can be funnelled into the hills if the tourism product (quality of accomodation, food and service) can be maintained.

When profits start flowing through to Dilmah, I think others will start to follow.

Diversification on estates is definitely one way of improving ROI. Hardwood timber, fuelwood, spices (depending on climate) are the usual things that are done. Most estates have some of the above.

hey jack,

The speculatrive bubble in the market over small stocks seems to have petered out a bit. I wondor what happened to that guy mahesh who was supposed to be driving up the stocks.

did you know that small investors call him ‘Budu Mahesh” ?

Who says ?

Hey Guys ,
It has been a long time since this discussion but there is a new book ( “Raising Less Corn, More Hell,”)out by a guy called George Pyle.I read a review.It seems to be going totally opposite to my argument .(in the lines of Ru).have to check it out.
I ‘m still sticking to my argument that Sri Lanka is too small and too densely populated to rely on agriculture to be the main engine of growth .we have to concentrate on manufacturing and services to survive .
The book is called
“Raising Less Corn, More Hell: The Case for the Independent Farm and Against Industrial Agriculture
by George Pyle”