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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » We must have a socioeconomic model for growth and prosperity

We must have a socioeconomic model for growth and prosperity

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Every country must have a socioeconomic model for developing the country and achieving sustainable growth and prosperity. The function of a sound model is to transform aspirations into reality by identifying all that needs to be done to achieve the aspirations.

What is prosperity?
What do we mean by prosperity for a country? My definition of prosperity is that every person should have a proper dwelling, electricity drinking water, three proper meals with good nutrition, access to good healthcare and education, a bicycle, a computer, and television, and knowledge of English to be able to access the wonderful world of knowledge that can only be accessed with a global language.

If 60% meet these criteria, the task is to take it to 100%. When a person meets these criteria, further progress will mean a qualitative improvement. That means better housing, moving from a bicycle to a scooter to a three-wheeler to a Maruti, etc.

We do not want the Indian model
India is acclaimed as a high growth model. A global power house in the making and various such statements are being made about India. The Indian model creates a middle class that is growing rich, but which leaves a much, much larger number of poor, primarily in rural areas, with no prospects of getting out of the poverty trap.

India has proved that the theory that good GDP growth will cascade through to all parts of the economy is a complete myth. It primarily cascades down into the pockets of the rich, if one includes the middle class in that category.

What is the best model for us?
The starting point for searching for the answer has to be the current profile. Should we build upon it or attempt to replace it? We are a rural economy. About 75% of the population are in rural areas.

Can we transform this into an urban industrial model? Can we do what Korea did? It is impossible to do this for two very good reasons. The cost of relocating the current rural population to urban cities and to provide the supporting infrastructure is a mammoth cost which we cannot afford.

The other very good reason is that there is nothing that we can make in large quantities that will absorb our current rural population that the rest of the world will buy. There is no viable point of entry into electronics, consumer durables, light engineering, car manufacture or heavy industry. Therefore we must conclude that there is no feasible model for making Sri Lanka a primarily industrial country.

It is logical to pursue a rural centric model
Therefore, as 75% of the population is in rural areas, what is logical is to build upon what we have where we have it. My vision is that we must develop a rural centric model.

The philosophy is to develop what we have in the rural economy and to then build on it continuously to move up the curve of prosperity. As a high percentage of rural activity is agro and fishing related, the model will also have an agro fishing bias.

Six building blocks
The socio economic plan is based on six building blocks. It cannot all be achieved at once. The task is to continuously work on all six building blocks spread over a series of annual plans.

The first step is to develop what we have. This means better agricultural practices, higher yields, and more mechanisation. Better commercial returns through cold storage facilities and better marketing. A similar approach has to be pursued with the fishing industry.

The second is to expand the base by inter cultivating in coconut land and rubber land, more intensive cultivation of existing agricultural land and bringing into cultivation all arable land now not cultivated. The parallel with fishing is to expand the base with the development of fish farms as an extension to fishing in the sea and lagoons.

The third is improving the infrastructure in terms of roads, better irrigation, better fisheries harbours, better transport, better advisory services to support agriculture and fishing, etc.

The fourth is the supporting infrastructure for the home, providing electricity, water, television and telephone coverage and connectivity to the internet.

The fifth is good healthcare facilities and good educational facilities in rural areas.

The sixth is an English teaching programme, five days a week on television and the same to be repeated in the print media. It is not possible to open the doors to global knowledge without a global language. English is the most logical global language.

Industry and services in a rural centric model
The model is not in any way anti-industry. We have two strands of industry and both are an integral part of a rural centric model.

We already have thousands of industrial activities and service activities in the rural areas. They range from directly related activities like building boats and agricultural implements to those that support the needs of a community like bricks and tiles and furniture and the plethora of services that every community needs.

When the rural economy prospers, these industrial and service activities will also grow and prosper in tandem with agriculture and fisheries.

The other strand of industrial activity relates to the manufacture of consumer goods, garments etc. These industries must be encouraged to move to the rural areas. This is happening for example in the apparel industry with more moving to rural areas.

Rural centric, therefore means developing the traditional occupations in rural areas and moving industrial activity to where the people live in rural areas.

Must protect the rural centric model
The most effective device available to protect the model is tariffs. If you move to a tariff free state, and take away the tariffs, our paddy cultivation industry will be decimated by the inflow of cheaper rice from elsewhere. We will see the end of many other agricultural products.

This will destroy the base of the rural economy and consequently destroy a vast number of small industries that serve primarily the rural sector. The removal of tariffs will also destroy many manufacturing industries like biscuits, chocolates, personal and household products.

The reason is that although we can match the quality we will not be able to match the cost profile of larger countries and let us not forget that one of them India is just next door.

Creating successful village communities

This model will be truly successful when people are happy living and working in this rural centric economy. If the village communities provide all that we defined as prosperity, why would people want to migrate to urban communities and live in congested urban high rise buildings and commute to work in crowded public transport?

We must be conscious of the need to create the emotional attachment to the rural communities. In the old days people did have a strong emotional attachment to their village. It is still there to a good extent. We need to nurture this.

Create emotional bonds to the village community
In addition to what the rural community provides in terms of good housing, good schooling and good healthcare, it must provide the ingredients that emotionally bond and bind the people of a rural community.

The sense of community has to be developed by having community activities, community meeting places, a twice weekly cinema for example in the community hall, playing fields for cricket, football and volleyball and netball, competitions with neighbouring villages to stir up the tribal instincts that will want your village to win.

It is all these type of things that will make it a community in which people are happy to live and not want to live anywhere else.

Many other countries have created thriving rural communities. A good example is Switzerland and even the mid-West farming communities in the USA fall into this category.

New activities to accelerate growth
Whilst building on what we have, we must identify new activities that will give a major boost to growth and exports and at the same time be in harmony with the rural centric model. There are two potential big hits.

Gems
The anecdotal evidence of those who are very knowledgeable is that there are very large tracts of gem bearing land that is now not being mined for gems. A geological survey should be carried and if this confirms the anecdotal evidence, the Government should acquire the land and parcel it into blocks and auction the mining rights.

This could create a big mining and gem cutting industry which will also stimulate the jewellery industry. This could be a major new source of foreign exchange. This industry fits well into the rural centric model.

Tourism
The other activity of great potential is tourism. In the recent past a lot has been written about tourism. It would suffice to say that Sri Lanka will get around one million tourists. Both Malaysia and Thailand will get over 20 million tourists. Arguably we have a better tourism product.

Creating explosive growth
The key question is, how do you get this model to explode into a spiral of increasing growth? Sri Lanka is a totally private sector economy. In addition to the major public quoted companies, there is a large number of big private companies including those in the apparel sector. The entire agriculture sector and fisheries is private sector, so is the entire retail network, and so are all the artisans builders and transporters, etc.

All our good historic rates of growth have been achieved by this private sector economy. The spirit of enterprise is very buoyant in our economy. That is the catalyst for creating explosive growth.

Access to capital will create growth
The fuse to light it is capital. This is a rather elusive concept. There are two types of capital: dead capital and live capital. Dead capital cannot be the fuse to light to spark explosive growth. The fuse to light is live capital. Let me explain the difference as I see it.

Live capital
If you own a house worth 30 million and if you have a good title to it, that is live capital. You can use this as collateral and raise 30 million and invest it. This creates another 30 million of economic activity.

If it gives returns better than the interest cost and you repay the loan there will be 60 million of assets which can be used as collateral to raise another 60 million for investment.

Dead capital
However, if you own a house but do not have proper title to it, that is dead capital as you cannot sell it or mortgage it and realise money for investment.

In the rural areas there is huge amount of capital as most people own their house and the land they cultivate. This mountain of capital is largely dead capital as people do not have proper title and cannot use it as collateral to raise funds for new activities.

If all those who own a house and a land are given proper title, all this dead capital becomes live capital as it provides them with valid collateral. This is the fuse to light to create explosive growth.

Role of the Government to foster a rural centric model
The Government has an important role to play to support the private sector owned economy. The role of the State is twofold. One is to own those industries that provide a service which must be provided at a subsidised cost like healthcare, education, water, and electricity.

The other role of the State is to provide the infrastructure for the private sector owned economy. This will include roads irrigation facilities and other infrastructure and good connectivity throughout the country.

This will come through the telecommunication companies but the Government must ensure this will happen.

The other key initiative is to ensure that everybody can read write and speak English. If the private sector banks are not active in providing funding the state must step in with development banks.

Interactive role between the Government and the private sector
The Government to perform its role needs money and the State depends on taxation to get its income. The more money it gets, the greater the ability to do all that they have to do. This will lead to further growth and more tax revenue, which will then provide more infrastructure, that will lead to further growth. It becomes a virtuous cycle of growth.

Everyone must pay tax
Everyone must pay tax, however small their income. The tax can be even .05% of income, but it must be paid. This will achieve two things: Create the understanding that the State can provide infrastructure only if we give them revenue by paying tax and create a feeling of ownership of what the State provides.

If there is wastage, people who pay tax will react against as it is their money that is being wasted. It will create an important mindset that is essential to support a growth economy.

Moulding the private sector to support growth
Although we have a private sector economy, it must be moulded to support growth. We should broad-base our companies so that everyone can own a piece of public companies, and to ensure that it will be professionally managed to secure its long-term future. Today over 50% of the value of public quoted companies are owned by less than 10,000 people.

Company tax must be linked to the pattern of share ownership. Closely held companies should have much higher rates of tax to encourage them to be broad based. Large private companies should have much higher rates of tax than public companies to encourage them to go public.

A large part of potential capital in private companies is dead capital as their value is only the value of their assets. The value of a company based on its future earning potential is released only when it becomes a listed public company. Therefore the difference between this and the pure asset value is the dead capital component. It is in the national interest to release this capital to support growth.

Management processes
A well-run economy must use good management processes. A large part of the infrastructure will be financed by donors through soft loans. It is essential to use good project management processes to ensure efficient completion of these projects.

There should be a network plan for each project and this should be put on the web and the public must have access to this web. This transparency will undoubtedly have a beneficial impact on performance.

The wellbeing of society
The wellbeing of our society is not determined solely by the economic wellbeing of the people. There are other things that are equally important, like freedom from violence and thuggery, freedom from bribery and corruption, and freedom of speech. The core of the problem that leads to everything else is bribery and corruption.

Corruption is making money without doing anything to earn it. It is quite simply robbery. This is what leads to all the other problems. Those who resist or oppose it will have to be silenced by thuggery and violence. The freedom to expose it is restricted by encroaching on the freedom of expression.

Robbery through bribery above a specified value should be punishable by a mandatory death sentence that cannot be commuted. Both giving and taking bribes have to be an offence.

A better society
A rural centric economy with thousands of villages is a structure that could lead to a better society. There will have to be significant devolution so that decisions are made closer to where the people live.

Devolution also means mammoth projects will get replaced by more regional projects through devolved budgets Therefore bribery and waste are more visible and are likely to be more strongly resisted by the community.

I have presented a view that moves away from globalisation, and a view that moves away from the Indian model of a rich country with larger number of poor people. Our rural centric model is more egalitarian and strives to deliver the prosperity we defined, at the outset.

A rural centric model has the best chance of delivering prosperity where every person will have a home three good meals a day electricity, drinking water, access to good education and healthcare, television, a computer with access to the internet, and a knowledge of English and a bicycle.

(The writer has a Master of Arts Degree from Cambridge University, UK, and the AMP of Harvard Business School USA. He counts over 40 years of board experience having served as a Director of several companies in Sri Lanka and abroad. He was a Director on the main Board at Reckitt Benckiser PLC, UK, where he worked most of his career and at the time of his retirement was Global Director – Pharmaceuticals. He has served as the Chairman of the Board of Investment and Sri Lanka Telecom Limited and was a Senior Advisor to the Ministry of Finance. Currently, he serves as Chairman of Hemas Holdings PLC and First Capital PLC.)
http://www.ft.lk/2012/08/02/we-must-have-a-socioeconomic-model-for-growth-and-prosperity/

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