Sri Lanka’s anti-corporate band wagon

Aug 27, 2013 (LBO) I grew up in nationalistic times. The talk was of prosperity driven by oil from Pesalai and fertilizer from Eppawala. We were told that we were not capturing the value of tea and rubber, because we were exporting them without adding value.

Western imperialists were still in control, extracting most of the value by controlling market access, we were told.

Forty years later, Pesalai oil is still spoken of in the future tense and the phosphate is still in the ground in Eppawala, preserved for future generations. So it was with great surprise that I discovered that a stunning 72 per cent of rubber now left Sri Lanka in the form of value-added products such as tires, gloves, pillows, mattresses and condoms. We all see Dilmah ads, so value addition in tea comes as no great surprise. But rubber had made even bigger strides, completely under the radar.

In both tea and rubber local companies had done the job, quietly, efficiently and with little fanfare. But do they get any gratitude, even from corporate leaders and public intellectuals? When mobs threatened to burn down the Weliveriya factory that produced a full 60 percent of the latex gloves exported by Sri Lanka, did anyone speak up for these heroes of value addition? Why not?

Anti-corporate discourse

It may be because our popular discourse is fundamentally anti-corporate. It may be because we do not see economic nationalism in terms of Sri Lankan companies conquering global markets, but in terms of filling containers with imported materials and embellishing them with lion logos.

It may also be because of a fundamental lack of courage. When a big company is opposed for whatever reason by “the people,” it’s easier for the commentariat to find ways of rationalizing the actions of the mob. If you defend the corporates, your motives may be questioned. “How much arethey paying you?” one may be asked. The path of least resistance is to side with “the people.”

In the early nineties, Aitken Spence was the target of unremitting protests, including monks threatening self-immolation and Anura Bandaranaike asking that the issue be taken up at the international level at the 1992 Rio Earth Summit. The crisis was managed; the Bawa designed hotel was built. Today, none question the wisdom of building the hotel. The only debate is about whether it is the best hotel in Sri Lanka.

I was reminded of the Kandalama controversy by a friend who tweeted “Lightning rods 4 pent up public anger: 20 yrs ago @aitkenspence bashed over Kandalama. Now #Hayleys on #Weliweriya.Both regulatory failures.”

When I asked whether he thought protesters were right on Kandalama, he said no. But, he seemed to be justifying the protests in Weliveriya. To talk about people asking for water and being met with bullets is easier than to talk about the fundamental injustice of demanding the closure of a factory that had been operating without any complaint for 17 years without any evidence and no due process. It takes more guts to defend a Sri Lankan company (or a multinational) in the here and now, than to say they were not wrong 20 years later.

Consequences of our actions

The Weliveriya factory is said to produce 60 per cent of Sri Lanka’s glove exports. Its raw material is latex, not sheet rubber.

Sri Lanka's rubber consumption - Lanka Businessonline

Dry rubber is an input for tire factories. It’s easy to store and easy to export. Latex is a difficult product that requires stabilization. It is likely that the sudden shut down in Weliveriya yielded a big mess of congealed latex and damaged equipment in addition to broken contracts and eroded credibility.

Let’s assume, with the wimpish majority of Sri Lanka’s commentariat, that after more than a decade of operation, the Weliveriya factory suddenly started to pollute the water around it. The speculation is that the company decided to turn off the purification equipment because electricity prices went up (I don’t believe this stuff, but this is what is being conjured up out of whole cloth).

Should drinking water trump all? Are we supposed to shut down 60 per cent of the country’s production of gloves for export just because of this? The Coase theorem tells us what to do in these circumstances. Compensate the affected parties: Give them piped water; Give them bottled water; Give them cash. But no, say the commentariat, we should close the factory down.

Assume that 50 per cent of the latex consumed locally is used to produce gloves (my sense is that this is a low estimate). That is 25,000 tons of latex. Sixty per cent of that is 15,000 tons. If this factory is taken out of production, there would be no market for 15,000 tons of latex. The price of latex has to crash. Producers (mostly smallholders now) have to switch to sheet rubber, which could also see a reduction in price.

Sheet rubber is easier to store and export. If one of the largest export factories using latex is closed down suddenly and arbitrarily, it is reasonable to expect that production will shift from latex to sheets, reversing the trend that saw more or less a doubling of latex at the expense of crepe, as shown in Table 2.

 Sri Lanka's rubber production and uses - Lanka Business Online

 

The demand for tires is not too good. But as Table 2 shows, demand for gloves and condoms in this age of HIV/AIDS is robust and growing. So the shift from latex to sheet rubber is likely to yield lower prices for farmers and increase the proportion of raw rubber sheets exported.

And if I was running Hayleys, I would locate my next gloves factory in Myanmar (they already have factories in Indonesia). If I was a customer of Hayleys like 3M or Kimberly Clark, I would insist that the factory be located anywhere other than in this lawless land. And the nationalists could restore the increased export of non-value-added rubber in their list of woes. Lacking industry and value-added agriculture, we would continue to talk of becoming a middle-income country but never actually become one.

The authors of our misfortune are assorted politicians including those in the UNP, disgruntled former employees, village leaders, and yes, also the spineless commentariat. We have met the enemy: it is us.

Rohan Samarajiva heads LirneAsia, a regional think tank. He was also a former telecoms regulator in Sri Lanka. To read previous columns go to LBOs main navigation panel and click on the ‘Choices’ category.