April 20, 2005 (LBO) - Policy analysis must begin from a realistic assessment of where we are and what we are. We are a small island nation located within the region with the world’s largest concentration of poor people, South Asia. We are about the size of greater Mumbai, one city in India, in population and we may be smaller than Mumbai as a market.
We do not have significant natural resources to use or to export; our agricultural products are not lowest cost, though the people who produce them are rewarded poorly. We do not have a significant industrial base; our biggest industry is apparel, currently suffering from quota-withdrawal symptoms.
By a process of elimination then, our future appears to lie in services, a sector of the economy that is even now the largest and which has been leading what little growth there is (7.7 percent in 2003, as against 5.9 percent growth for the economy as a whole).
The country has been living off the export of low-value-addition services such as housemaid services to the Middle East and East Asia, which amounted to USD 1.4 billion in 2003. According to the Central Bank, “remittances have become the most steady and largest single net foreign exchange source to Sri Lanka, and were sufficient to cover 92 per cent of the trade deficit in 2003.”
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.
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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 . . . .”
Wealth creation and job creation in Sri Lanka depends on exports. We can continue to export agricultural products, but that’s a difficult path because we are not the lowest-cost producers. Vietnam and Kenya can sell tea for less than it costs to produce it here; our rice costs a lot more to produce than the prices of imports from Vietnam; and there is no mass market for the varieties of rice that we produce. What the world wants are long grain and basmati; what we produce are samba, kekulu, etc.
We can be successful agricultural exporters if we create and exploit niches, where higher quality and branding can sustain higher prices. The story is no different in industry. Agricultural and industrial exports can and should be encouraged, but the services sector must receive greater support because it will result in more exports; more jobs; greater growth and will improve the lives of more people than the alternatives.
Services are not well understood, unlike agriculture and industry. This, plus the existence of historically established lobbies in the latter sectors, has led to relative neglect of services by all governments. But the present government, which rode to power on campaign rhetoric that glorified agriculture, appears to be neglecting services even more. The unsuccessful request for USD 84 million from the US Millennium Challenge Fund for irrigation projects including the JVP’s 10,000 tanks program exemplifies this government’s fixation on agriculture (http://www.lankabusinessonline.com/millennium-challenge-corporation-of-us-asks-sri-lanka-to-whip-its-economy-into-shape/).
Services trade occurs in four modes:
Mode 1, wherein the seller remains in country A and the buyer remains in country B. Example is a doctor in India who treats a patient in Sri Lanka, using telecommunications as the medium.
Mode 2, wherein the seller remains in country A and the buyer comes to Country A from Country B. Example is a Sri Lankan heart patient going to the Chennai Apollo Hospital for treatment.
Mode 3, wherein the seller from Country A establishes a commercial presence in country B in order to sell services to the buyer in country B. Example is the establishment of an Apollo Hospital in Colombo.
Mode 4, where people from country A come to country B to sell services. This can happen with Mode 3. For example, Indian doctors may come to Sri Lanka as part of the effort to maintain the Apollo brand. It can happen without Mode 3 as well, as when Sri Lankans go to the Gulf to supply house-maid services.
We export services in all these modes today, mostly Mode 4. In order to improve the work conditions and incomes of our service exporters (not only firms, but all who work in these industries), the government must act to improve the conditions of service supply and trade. Modes 1 and 2 must be encouraged. Greater value addition under Mode 4 must be facilitated.
Business process outsourcing as an example
Let us take the example of business process outsourcing (BPO). The most familiar example is a call center, where a whole group of people with telephone headsets answer calls from a firm’s customers on behalf of that firm, using computer based information systems. But there are many kinds of BPOs, some that require higher levels of skills and value addition.
Because it is outsourcing, the service providers are not located in the same place as the firm and are not employees of the firm which is receiving the calls. In some cases, they can be in a different time zone and may be even on a different continent. When this service is provided across national boundaries, it constitutes Mode 1 services trade, conducted using telecommunications. The key elements are reliance on computer-based information systems, telecommunications, and specialization.
BPO activity started in the early 1990s in the American Midwest, in Ireland and in India. By the late 1990s, India, particularly southern India, had become a major BPO supplier. But Sri Lanka, despite its many similarities with Southern India, missed the bus. It was only in 2004 that Sri Lanka attracted significant BPO business. The reasons lie in wrong decisions taken from 1997 onward.
In 1997, the government gave a five-year exclusivity to Sri Lanka Telecom and the Japanese company that undertook to manage it. This poorly crafted legal commitment was interpreted by the Japanese and the Sri Lankans appointed to manage SLTL as a comprehensive monopoly over international services.
Instead of trying to develop international services in ways that would serve current and future customers, they spent all their efforts defending this misguided and ambiguous monopoly. Court cases proliferated; not new business. Not seeing redundancy in international telecommunications supply, not seeing flexibility in pricing and service options, BPO firms bypassed Sri Lanka.
It was only in 2003, after the Wickremesinghe government decisively ended the SLTL’s exclusivity that BPOs started looking at Sri Lanka. The regional resource center being built by HSBC in Rajagiriya (with workers already serving customers in temporary accommodations) is Sri Lanka’s first high-profile BPO operation.
The fact that HSBC obtained its international telecom capacity from VSNL Lanka, a new international operator licensed in 2003, is evidence that telecom supply was a key inhibitor. The peace moves of the Wickremesinghe government were obviously supportive, but that alone cannot explain the absence of BPOs prior to 2003 and their proliferation after that. VSNL Lanka which carried 3 mbps of traffic in early 2004 was hauling 45 mbps a year later, evidence that the industry is growing fast (http://www.lankabusinessonline.com/vsnl-lanka-links-hsbcs-colombo-call-centre-with-a-45-megabits-per-second-data-line/).
What does BPO business mean for Sri Lankans? It means higher wages and working conditions superior to those in government and most private sector offices. It can be somewhat repetitious, and does not allow for slacking. Most likely, a young person would not want to spend his or her entire life in the BPO industry, but it provides a good foundation for a job elsewhere or for starting a new business.
One major limitation is that most BPO jobs require fluency in English. But, niche applications exist where, for example, accountancy or financial analysis skills matter more than English.
This kind of Mode 1 services trade, where the buyer and the seller stay in their respective countries, is superior even to trade in advanced Mode 4 services, where Sri Lankan accountants go to the seller’s country to sell their services. It allows the service suppliers to stay close to their families; more of the money that they earn is spent where they live, providing more business to others and growth for the overall economy.
Kolambata kiri; apata kekiri
It is a fact that the new BPO businesses are being set up in greater Colombo and Kandy; that the young people getting these jobs are from among the already privileged, English-speaking middle class. But this does not have to be.
The main reason for export industries clustering around Colombo, despite its expensive rents, congested roads and higher wages demanded by workers, is the lack of adequate infrastructure in the regions. The quality of electricity is not very good in Colombo, but still the blackouts and voltage variations are worse in the regions.
The fiber optic cables that provide high quality and ultra reliable telecommunications (recall that in the BPO business, a telecom interruption means the cessation of business; and that in some BPO activities, the quality must be such that the customer feels that the service representative is talking from next door), simply do not exist outside the Western and Central provinces, and small portions of the Northwestern and Sabaragamuva provinces.
The e Sri Lanka Initiative under which substantial subsidies would be given using competitive means for the building of high-quality broadband networks, including fiber optic links to the greater Colombo area and to the outside world for two areas roughly demarcated by the towns of Weligama, Kahawatte, Bandarawela and Hambantota in the South and demarcated by Anuradhapura, Trincomalee and Jaffna in the North is Sri Lanka’s best chance to open up opportunities for rural youth.
Networks are necessary but not sufficient. While Matara and Jaffna contain concentrations of educated, educable youth, one has to admit that the absolute numbers of those with English skills may be somewhat less than in the Colombo and Kandy areas. This is even truer when we think of places like Buttala and Kilinochchi.
The e Sri Lanka vision included a long-term plan to educate young people in IT, English and attitude. But in the short term, it also envisaged the provision of BPO jobs that were to be generated from inside the country that did not require English.
Think about calling a bank or your mobile provider about some service problem today. You are talking to someone working in a call center. Because of infrastructure problems and also a certain lack of imagination, these domestic call centers tend to be located in greater Colombo. But under e Sri Lanka’s reengineering of government initiative it was planned to take the lead in moving those jobs, outsourced and managed by the private sector, out to the rural areas with adequate infrastructure.
In conclusion
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.
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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.
-Rohan Samarajiva: samarajiva@lirne.net
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