Inflation: Banking on the Governor

“Good morning, Dad. What’s up?”

“What a question, Son! If you really want to know what’s up, you must be one of the very few persons who are blissfully unaware. Inflation is up!”

“Oh, no! Not again! What’s happening, Dad? Why are prices continuing to go up?”

“If you want my opinion, Son, it’s because nobody is doing anything to bring it down.”

“Who can do anything about inflation, Dad? Isn’t it one of those things that people just talk about when they run out of things to discuss – like the weather?”

“That’s what seems to be happening nowadays. It’s the appalling silence of the good people that is letting things drift – and I’m not referring only to the economy. In fact, people in positions of authority are doing things that could intensify the inflation problem.”

“Like what, Dad?”

“Take the case of corporate dividends, Son. Companies need money to fund their expansion plans. Much of this money comes from internal accruals, also called profits or retained earnings.”

“Okay, so..?”

“When the government mandates that a certain amount of profits must necessarily be paid to shareholders, it goes against conventional wisdom. It restricts the company’s access to internal accruals.”

“But, if internal accruals are not enough, can’t the companies borrow from banks instead, Dad?”

“Yes they can, Son – and will. But that would result in an increase in money supply, which results in higher inflation.”

“Hmmm… I see, Dad.”

“Another point: Typically, in almost all economies, interest rates are higher than inflation. However, with inflation in Sri Lanka at almost 20%, there is no savings instrument that will yield as much. This is a disincentive to saving because it is better to spend today than save for tomorrow. Given the choice, people are spending on goods today, while they are still within their grasp.”

“But, that is not sustainable, Dad. What about the future?”

“This will continue as long as inflation is higher than what a citizen can earn on his investment, Son. Why do you think there is so much conspicuous consumption and such a low propensity to save, in our country?”

“So, very little money is going into financial institutions and banks, which have to play a role in channeling savings into productive investments. Is that the case, Dad?”

”Yes it is, Son. And, as a consequence, there is less capital formation in our country than there should be. Productive organisations do not have access to adequate investible funds. They have to borrow to fund their growth.”

“But that would increase the money supply and inflation, Dad.”

“My point exactly, Son. Our economy is in a state of disequilibrium. A vicious circle, if you will. And I’m concerned...”

“Can’t we break out of the circle, Dad?”

“Yes, we can – and must, Son. But first, let me tell you what happened to the world’s only superpower. It’s a story of how disequilibrium cannot sustain.”

“Do tell, Dad…”

“Instead of going for long-term macro economic solutions, they kept raising interest rates to make the dollar attractive to investors – and managed to prop up the dollar. But, by doing so, the Federal Reserve painted itself into a corner. They cannot afford to raise rates any longer because the cost of servicing the debt would be too high. Therefore, the dollar has become unattractive and a fall is imminent in the medium term.”

“Come back to inflation in Sri Lanka, Dad…”

“The banking system needs to pull up its proverbial socks and curb monetary expansion, Son. They should focus on quality of lending rather than quantity. Unless this unbridled extension of credit is reversed, inflation will continue to gallop along.”

“But how can this be done, Dad?”

“This is ideally something that our central bank governor should be addressing, Son. If I was him, one thing I would do is raise interest rates significantly. That would make savings attractive and borrowings unattractive, and would mop up some of the excess liquidity that is sloshing around. I’m sure that he has many more solutions.”

“Maybe it’s the government that is operating on a deficit, Dad.”

“You may be right, Son. It is probable that additional government spending is causing inflation to rise. But that is also because the central bank is printing enough money to accommodate that government spending. The bank should be forcing consumers and businesses – and even the government - to cut back.”

“Hmmm… Looks like the inflation buck stops there, Dad.”

We Don’t Need No Education

“Welcome back, Dad. How was work?”

“It was fine, Son. How was your day? I notice you’re watching TV. Does that mean you’ve finished your homework?”

“Not yet, Dad. I don’t feel like doing homework.”

“Son, on a few things, there’s no compromise - and homework just happens to be one of those things. A boy’s gotta do what a boy’s gotta do.”

“But Pink Floyd sang, ‘We don’t need no education’, Dad.”

“Examine that statement closely, Son. This pink chap whom you have taken a fancy to has used a double negative. Shorn of its negativism, what he actually said was that we do need some education. So there!”

“But, Dad… There’s so much being said nowadays about the fact there isn’t enough opportunity for higher studies in this country.”

“Higher studies is for the specialists, Son – those who want to know more and more about less and less. You stick to the Three Rs for the time-being, Son.”

“The Three Rs, Dad..?”“Yes, Son. That’s a widely-used abbreviation in the United States for the basic elements of a primary school curriculum: reading, ’riting (writing), and ’rithmetic (arithmetic).”

“So much for their spelling skills..! But what thereafter, Dad? There aren’t enough university seats to go around, it seems.”

“That is a fact, Son. More than 100,000 students pass their Advanced Level examinations each year but there are only about 15,000 university seats available to them. That means, every year, nearly a hundred thousand students do not have access to higher education within the country.”

“But they can go abroad to study, can’t they, Dad?”

“Yes, they can, Son - if they can afford to. Some of our best and brightest will go abroad to study, and stay on. Besides, it would be a drain on the country’s foreign exchange reserves too, because their fees would most likely be paid from here, in precious foreign currency.”

“What about those who graduate from Sri Lankan universities, Dad?”

“Many of them would go abroad too, Son. They will also contribute to this phenomenon called brain drain, instead of contributing to the country. But that’s okay because they would send foreign exchange back home. We sow in rupees and reap in dollars.”

“Cool, Dad.”

“It has been observed that our country is better at creating graduates than at employing them. Forcing them to remain within the country would simply reduce our return on investment.”

“So, what needs to be done, Dad? The fact that these blokes have to go abroad to study could result in something of a crisis, couldn’t it?”

“I guess so, Son. Now listen to me: When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.”

“I appreciate that nugget of wisdom, Dad. But what are you getting at?”

“The solution is simple, Son: Sri Lanka has good educational facilities, only not enough of it. We should invest in more educational facilities that can generate a global income. If existing institutions are unable to cope with the demand for higher education, we must throw higher education open to the private sector.”

“But, wouldn’t that result in standards getting diluted, Dad?”

“Not if you get these private institutions affiliated to and accredited by the universities, to start with. For example, Son - The best management institutes in India are independent, not even affiliated to any university.”

“What else needs to happen to the education system, Dad?”

“Our curriculum needs to train students to think creatively and critically, Son – not how to memorise, but how to apply knowledge. Why do you think the British examinations permit you to use a calculator while the local ones do not?”

“I don’t know, Dad.”

“Because the foreign exams test your ability to apply. They prepare students for the real world. Goldsmith’s village schoolmaster whose ‘one small head could carry all he knew’ is an outdated idiom.”

“What else, Dad?”

“There needs to be more interaction between academia and industry. Students need to be trained in team work, communication and leadership too... Plan for the future, Son, because that’s where I think we are going to spend the rest of our lives.”

“Okay, okay, Dad… I’ll finish my homework…!”

On International Anti-Corruption Day

“Happy Anti-Corruption Day, Dad!”

“Same to you, Son… Did you know that today is three years since the UN signed the International Convention against Corruption? My guess is that several persons in positions of power, in many countries, have been caught demanding bribes and have been punished since."

“They were asking for it, Dad! Power corrupts and absolute power corrupts absolutely.”

“I would say that the bribe-giver is as guilty of corruption as the receiver, Son…”

“They will pay for it! Tell me something, Dad – How did the word ‘red-handed’ originate?”

“It has some gory origins, Son, dating back to 15th century Scotland… It refers to the act of catching a murderer in the act, with red blood still on his hands.”

“Ughh! Then, what was that other new word you used last week, Dad - ‘Ethical’… What does that mean?”

“In the world of business, ethics is a phrase that keeps popping up nowadays, Son. It refers to knowing what it right or wrong in the workplace and doing what's right. All may be fair in love and war, Son, but not necessarily in business.”

“You mean there’s a right way in business too, Dad? You could have fooled me.”

“Of course, Son – There is a right way, and it’s not always as easy and clear-cut as your Arithmetic sums. Let me give you an example: Suppose a steel company makes a batch of steel that is less durable than its products normally are, although the steel is above industry standards, what should it do?”

“Why, sell it, of course, Dad.”

“I might agree with you on that, Son… But think deeper into the situation - Should the company tell its customers about the difference in quality? Should they sell this batch at a discount to its normal price? Should the sales team be told about the lower quality, so that they in turn can keep buyers informed?”

“Gee, Dad – Tough questions, like the steel itself.”

“Yes, they are, Son - and there is no concrete right or wrong answer in this case. It’s not all black and white, but many shades of grey. What is right and wrong sometimes depends on the industry context and how far the society has progressed along the road of business ethics…”

“Give me more examples, Dad.”

“Supposing an oil tanker belonging to a shipping company accidentally spills crude oil into the ocean, resulting in a minor ecological disaster. Despite that, at the annual shareholders meet, the management declares the highest ever profits and dividends in the shipping company’s history. They dismiss protests against the ecological damage as ‘outpourings of fanatics’. Has the company performed well, Son?”

“They have definitely not, Dad. That was an easy one to answer.”

“Yes, Son – That’s because, as Sri Lankans, we tend to be naturally conscious of our ecology… Now, let’s look at ethics at a transactional level. If the president of a company places an order for computers from the company in which his son is working – and the son ends up getting a commission. Is that fair, Son?”

“I would call it a conflict of interests, Dad.”

“Attaboy! If you were working in such an organisation, what would you do? Sometimes, employees fear for the consequences of reporting wrongdoing. But ethics ought to over-ride all else. There’s a phrase that has gained currency in today’s world: The ‘Whistle Blower’. He is a person who draws attention to wrongdoing within an organisation.”

“Imagine the cacophony in organisations with many whistle blowers, Dad! It would be deafening…”

“Insider trading on the stock market is another common unethical practice that has given equity trading a bad name, Son.”

“So, what needs to be done, Dad?”

“We need to clean up our act, Son. Let’s see what we can do to make business in this country even more responsible and respectable. We need to start thinking and talking about these things. Now is as good a time as any to progress further along the road of business ethics.”

Business isn’t all about Money, Honey

“Dad, the objective of business is to make oodles of money for its shareholders, isn’t it?”

“Business is certainly about making profits, Son - but it’s not only about making profits. How profits are generated is as important as how much is generated. Business needs to be conducted responsibly.”

“How do you say that, Dad? All that you Management-types keep talking about is PAT, RoI, EVA and such three-letter acronyms that are related to money… In addition to market share and the share market, of course!”

“Not really, Son, there’s much more to it nowadays. We have finally figured out that companies cannot exist in isolation…”

“The saying ‘No man is an island’ seems to apply to companies too, Dad...”

“Responsible companies are realising that we are not just living on the earth, Son, but off the earth too. Even the simple act of cutting down a tree has some detrimental impact and takes its toll on the planet, in terms of global warming and disrupting the ecological balance.”

“I didn’t realise that, Dad.”

“…And then, Son, some companies have not been particularly responsible about disposing of waste materials that are generated during their production process. These effluents damage the environment too.”

“But, if companies stick to norms that are legislated by the government, and do not contravene environmental limits, everything should be tickety-boo, right, Dad?”

“No, Son – unfortunately, governments have been known to be laggards in this respect. They normally wake up to a problem after it has occurred, like closing the stable door after the horse has bolted. It takes a rare sense of foresight on the part of governments to pre-empt something like environmental degradation. We are always in damage-control mode when it comes to legislation on such matters.”

“So, you’re saying that it’s up to companies to take the lead, Dad…? I read that the world woke up to the ozone-layer problem in the nick of time, and has managed to stem the rot.”

“Stem the rot is a brilliant choice of words, Son… Another aspect that companies have erred in is by disregarding the communities that they operate in. An island of prosperity in an ocean of poverty is unstable. Corporate houses may have realised this a long time ago, but only now are they beginning to do something about it.”

“I see, Dad. Organisations cannot go on utilizing the earth’s resources without being conscious of the impact of their actions. They should use stuff like wind energy and solar energy instead of non-renewable energy sources…. But how will they benefit?”

“I could regale you with stories of companies that failed to heed environmental concerns and failed, Son… Like Hershey Foods, which lost a US$ 12 billion deal because it failed to heed the social and economic concerns of the town it was based in.”

“That’s twelve with nine zeroes… in dollars! Wow!”

“Then there are other tales of companies that grew in popularity and profitability… Like PPL which agreed to remove its hydro-electric dam from a river – and became the darling of environmentalists.”

“What about in our own country, Dad?”

“Take polythene bags, for instance, Son…”

“You’ve been telling us not to take polythene bags – and now you’re asking us to take polythene bags, Dad?”

“No, Son… No polythene! The government has finally thought it fit to ban polythene, but responsible companies have already started doing something about it. Some companies have adopted bio-degradable packaging. There’s a retailer who used to give a sizeable discount to those who do not ask for polythene packaging. The retailer lost a little money, of course, but the gains to the environment were significant.”

“Are there any other things, Dad, other than environmental pollution..?”

“I know of another company that has scrapped certain carcinogenic substances in favour of a healthier substitute for the welfare of its employees and customers. Another company trains and employs underprivileged sections of society."

“That is good, no, Dad?”

“It certainly is, Son. Companies must realise that they are living off society. Merely paying their taxes and expecting the government to handle everything else may be legally okay, but it is neither ethical nor does it exhibit good corporate citizenship.”

“Exhibiting citizenship? Is that like showing your National Identity Card when asked to do so?”

“No, Son – It is about companies behaving in an exemplary manner towards the environment and society that they operate in. Companies are persons too, and have to do what is right for the country and community. In fact, my job has become thrice as fulfilling – My organisation is talking of ‘Triple Bottom Line Reporting’.”

“Three bottom lines sure sound more interesting than one, Dad, but what does it mean?”

“Earlier, Son, companies used to focus on one bottom line – that is, profits. But now, they have started reporting results on three dimensions: economic, societal and environmental. Organisations like Commercial Bank and Dialog are already doing a lot in this regard.”

“What can a company do about the society, Dad?”

“They can cater to the needs of the underprivileged, Son - in terms of their educational and health needs, for example.”

“What else, Dad?”

“There is a move towards green, Son – and I’m not making a political statement here. Business should be sustainable and should make a positive contribution to the environment and the societies that they operate in. What comes from the people should go back to the people many times over.”

Market Forces & Confused Strategies

“Dad, I’m confused about the ways of the government.”

“It’s the prerogative of governments to keep their citizens guessing, Son – a kind of perpetual exercise to keep people mentally agile, I guess… But what have they done now, to befuddle your little brain?”

“They have increased the price of electricity but brought down the price of petrol, Dad.”

“Come on, Son. Don’t attribute everything to the government. At this rate, you’ll be blaming them for the thundershowers next. Prices of some things are controlled by a force that is more powerful than even the government.”

“You’re kidding me, right, Dad? You don’t say God determines the prices of certain things..?”

“Oh, He does, Son – in His own subtle way. But I’m referring to market forces.”

“Market forces, Dad? You mean those hawkers in Pettah market who force you to buy things you don’t need?”

“Cut out the wisecracks, Son. I’m talking about fundamental economics here – the forces of demand and supply, and how they determine prices of goods.”

“I thought Price equals Cost plus Profit, Dad..?”

“Yes, as a mathematical formula, that is correct, Son. It costs more today to generate and transmit a unit of electricity, and that cost increase has been passed on to the consumer, resulting in higher electricity tariffs… That is why the price of electricity has gone up and …”

“So, Dad, are you also saying that petrol prices have gone down because it costs less to produce a litre of petrol than it did in the past?”

“Don’t interrupt me, Son… No, that is not the case. I was coming to that – the forces of demand and supply: When the demand for a commodity (which is the quantity asked for by all buyers) is more than its supply (the quantity that all sellers are willing to sell), prices go up.”

“And what if supply is more than demand, Dad?”

“The opposite happens, Son. Prices come down, which is what has happened in the case of crude oil and petroleum prices. Giving the government a proverbial pat-on-the-back for that is like giving credit where debit is due!”

“Hee-hee-hee! Is this discussion leading somewhere, Dad?”

“Remember, Son, that when you see the prices of certain commodities rising or falling, it may just be because the international price of that commodity has risen or fallen – and we happen to import that commodity.”

“So, what influences international prices then, Dad?”

“Almost anything, Son. You’d be surprised… Demand for crude oil and petroleum products, and therefore their price, can be influenced by something as isolated as weather patterns and how cold the winter is expected to be in the US. The colder weather results in higher demand for heating fuels that come from petroleum products. Higher demand, higher prices…”

“The North winds doth blow and we shall have higher prices... That’s a chilling thought, Dad!”

“…Or whether OPEC nations, in a rare moment of magnanimity, decide to increase crude oil output, thus increasing supplies to this fuel-guzzling planet and bringing down the price of petroleum.”

“May such moments of magnanimity increase! Are you saying that the government and public sector companies that sell petrol can do nothing about it?”

“I’m not saying that, Son. Instead of buying petrol at prevailing spot prices, we should be buying better – doing some forward trading, and dealing in futures and options. By doing so, the country can reduce its risk and bring about some stability in petrol prices… Then, there’s local taxation that also impact the domestic price.”

“Heavy stuff, Dad. But why this focus on petroleum products?”

“You started it, Son… and petroleum products are a big item of imports for us. But the same demand/supply principles apply to many other commodities. Take diamonds, for example. There’s an organisation called De Beers that controls and restricts supply of rough diamonds, to keep prices high…”

“A gem of an idea, if ever there was one. What say, Dad?”

“Yes, Son… And gold mining companies also determine how much bullion to supply depending on the international price of gold. When prices are high, they dig deeper.”

“That’s a 24-Karat strategy too, Dad. But there are some things for which supplies cannot be controlled, no? Like fish and vegetables that get spoilt if stored for too long.”

“Very true, Son. As my buddy Benjamin used to say, ‘Fish and visitors smell in three days.’ But even these can be extended to some extent by refrigeration and preservation.”

“I must warn our visitors, Dad…”

“Huh..? Hey, Son..! You know what I meant.”

“Just kidding, Dad.”

“Son, do you know what the most perishable item of daily use is?”

“What, Dad? Time?”

“Hmmm… How true, Son. But I was thinking of something else… See that chap? He’s just paid twenty-five rupees for his daily newspaper, but – when tomorrow comes – it won’t even be worth the paper it’s printed on.”

“Stale news, Dad?”

“You said it, Son.”

Money, Inflation and A Young Mind

“What’s up with you, Son?”

“Nothing much, Dad. I’m just reading the newspapers… What is this budget thing that everybody has been talking about lately?”

“The government prepares a statement of income and expenditure, Son, just like we do for the household every month, but they do it every year. In a nutshell, that’s what it’s all about.”

“Just like we do, Dad?”

“Yes, Son, with one significant difference. Unlike the common man, the government has an exit route when income is inadequate to meet expenditure. The government can spend more than it earns and run up what is called a ‘budget deficit’.”

“How’s that, Dad? You keep telling Mum to live within your income… Cut your coat according to the cloth and all that jazz…”

“Yes, Son. Fortunately, when the government doesn’t have enough money, they can simply print some more – as much as they need. Don’t you wish we could do the same?”

“Wow! Is it as simple as that for the government?”

“Not really, Son. There are lots of factors involved – foreign exchange rates and import bills to be paid, for instance… But, simply put, unless the increase in money supply is accompanied by a commensurate increase in production output, this could lead to runaway inflation.”

“What’s wrong with that, Dad?”

“Inflation affects the common man more than anybody else, Son, because his income rarely keeps pace with inflation. Even worse is the plight of pensioners and fixed-income earners”

“Fixed income earners, Dad..?”

“Yes, Son. Those who earn fixed amounts every month – like the salaried class and those who depend on interest earnings for their survival. The rate of inflation is already higher than what can safely be earned on a fixed deposit.”

“Hey, now you’ve got me stumped… What’s the connection, Dad?”

“The real value of a fixed income earner’s earnings is reducing every day. Even those who have invested their money in banks will find that, even after adding interest, they can buy less with the money they have saved. Thanks to inflation, their money is diminishing in value with every passing day, Son. Theoretically, it makes more sense to spend today than to save for tomorrow. This is a disincentive to saving.”

“So, why save then?”

“You don’t realize, Son. If everyone pulled out money from savings and started spending like there was no tomorrow that would increase the money supply and intensify the inflation problem.”

“So, what’s the solution, Dad?”

“Inflation needs to be brought under control, Son - by focusing on curbing avoidable expenditure and reducing the budget deficit. Look at our defence expenditure, Son. I think this is the only significant item that destroys rather than creates. Without it, there would be hardly any deficit and inflation would be brought under control.”

“Surely, there needs to be money spent on defence of the nation, Dad?”

“Yes, Son. But most countries’ defence budgets are to protect themselves against external threats and aggressors. We are one of the few countries where we turn our weapons against our own people. It is time we beat our swords into ploughshares, and spears into pruning hooks.”

“Huh?”

“We are fighting against ourselves, Son. If only we could reduce our defence expenditure and invest that money in education, healthcare and infrastructure instead – we can really build this nation.”

“But that will be possible only if we can win the peace. Only then can prosperity return to this land – Right, Dad?”

“You’re dead right, Son.”

Export: A Passage to India & Europe

The Free Trade Agreements (FTAs) that Sri Lanka has entered into with India and Pakistan have enlarged the export market that Sri Lanka’s business fraternity has easier access to. More recently, the tariff concessions that have been made available by the European Union (27 EU countries) have provided a further impetus to the country’s export opportunity.

The Ceylon National Chamber of Industries organized a seminar at the Taj Samudra earlier this week, to highlight these opportunities.

India/ Pakistan
Dr Nihal Samarappuli, Executive Director - Research & Documentation – BOI, talked of the large opportunity that has been created by the India and Pakistan FTAs. He indicated that the ILFTA (Indo Lanka Free Trade Agreement) has resulted in preferential and easy access to the large and burgeoning Indian market. Under the ILFTA that came into effect in March 2000, more than 80% of tradable tariff lines/ products attract zero-duty on import into India. India has now overtaken Japan to become Sri Lanka’s No. 1 importer.

Explaining his method for selecting potential sectors and products, Dr Samarappuli indicated that, firstly, the item should not feature on India’s ‘negative list’. (This is a list that includes items on which protection to local industry is considered essential.) Thereafter, the potential trade value and the degree of duty advantage vis-à-vis other countries need to be considered. Finally, qualifying criteria - ‘rules of origin’ and domestic value addition - need to be assessed. “Using this method, India looks like an extremely attractive market for our rubber based products,” he said.

Allaying fears that the ILFTA could overwhelm Sri Lanka, Dr Samarappuli gave the example of the North American Free Trade Agreement (NAFTA), which involves the US, Canada and Mexico. “Mexico has benefited the most from NAFTA, compared to the bigger countries.” He suggested that the same could be the case for the ILFTA. This looks like a valid observation because, since the agreement came into effect, bilateral trade has multiplied and the Import-Export ratio has improved from 10.8:1 (in 2000) to 2.5:1 (2005).

India and Sri Lanka are currently in the process of negotiating a Comprehensive Economic Partnership Agreement (CEPA). This will be an improvement over the ILFTA since it is expected to (a) reduce the negative list, (b) include services within its ambit, and (c) add a chapter on investment.

Europe
The EU’s concessions, which have provided duty-free, quota-free access for 7,200 products, come under the Generalised System of Preferences (GSP) scheme. These concessions are conditional to Sri Lanka’s meeting specified standards on human development, labour conditions, environmental protection and good governance.

Explaining this condition, A K Perera, Deputy Director General – Dept of Commerce, said that the EU’s broad concessional guidelines are valid for a ten-year period from 2006 to 2015. The specific scheme runs for an initial three-year period that ends in December 2008. Before the expiry of this scheme, the EU will evaluate how Sri Lanka has fared against its performance parameters - and could, as a consequence, modify the scheme.

Highlighting the export opportunity that has been created by the GSP scheme, George Perera, Deputy Director - Marketing EDB (Export Development Board), pointed out that most of Sri Lanka’s recent export increase has come from the EU market. Despite this fact, he said, the EU is a buyer’s market and therefore one that is difficult to make inroads into.

Conclusion
A K Perera also cautioned that the current trend is towards reduction of import duties by all players in the WTO. Hence, a myopic dependence on preferential tariffs is not entirely a good situation. Manufacturers should simultaneously improve their productivity, so that the market gains are sustainable. Perera cited China as a country that is competitive even after paying customs duties.

Sunil Wijesinha (Chairman, Dankotuwa Porcelain Ltd), Lalith Kahatapitiya (Chairman, KIK Lanka Ltd) and Mr Ananda Rajapakse (Chief Executive Officer, Orange Electricals Ltd) shared the stories of their success in the export market.

Prolonged war taking toll – Ranil

The ballroom was an appropriate setting as Opposition Leader Ranil Wickremesinghe earlier this week waltzed through a speech on "Maintaining the balance of peace building and economic development: the way forward".

He emphasised that the national problem is a political one that cannot be solved militarily. A long term solution has to necessarily address political aspirations, and be based on power sharing and devolution of power.

Speaking at the ‘Business for Peace Initiative’ forum organized by the Federation of Chambers of Commerce and Industry of Sri Lanka, held on the eve of the fifth anniversary of the Ceasefire Agreement, Wickremesinghe said, "If there is no political agenda, you will not succeed… However", he added, "when you resolve the political issue, terrorism will wither away." He pointed out that long term peace is possible only with a negotiated settlement that is acceptable to the Sinhalese, Tamils and Muslims.

Paraphrasing Karl von Clausewitz - the military strategist who described war as an extension of diplomacy, Wickremesinghe pointed out that war has become an "extension of politics". If war continues, it would most certainly take a greater toll on the economy. This low-intensity war has already cost Sri Lanka 1% to 1.5% of GDP on defence expenditure every year since 1983. “This war is not winnable. The LTTE has two fronts to act on: conventional warfare and - if they become desperate, they go for economic targets,” he said.

Wickremesinghe said when he signed the Ceasefire Agreement, he was thinking about the economy… "If the economy gets weaker, the government gets weaker", he pointed out. If Sri Lanka is to develop, a low rate of interest is a ‘sine qua non’ … "If inflation is high, if interest rates are high, if people have lost confidence, they won't bring their money back", he warned.

The fundamental roadblock, according to Wickremesinghe, is that the government has not made up its mind whether or not it wants peace. Economic development being a part of peace building, the two cannot be separated. However, Wickremesinghe says that the government has no credible proposal for discussion and is only interested in perpetuating its rule. "We cannot allow them to sacrifice the future of our country to build their own futures," he emphasised.

President Mahinda Rajapaksa has made the MoU (Memorandum of Understanding signed between the SLFP and UNP) inoperative because he didn't want to pursue the peace process, Wickremesinghe alleged. He called upon the government to make its views known by March 15, failing which the UNP will pull out of the APRC – the All Party Representatives Committee that is trying to work out a solution to the ethnic conflict. The time has come to tell the government, "Resolve the issue or else..!"

"Before peace, you must have democracy," said Wickremesinghe. "We are faced with the issue of human rights violations. All of a sudden, we are becoming a ‘pariah’… What is required is a mass citizen-based movement.

Everyone should get together to make our voice heard… That would also help the international community help us." He concluded on an ominous note: "If we don't act now, it will be too late."

However, with the future of the country - and even democracy - being compromised, Wickremesinghe showed nimble footwork by doing the quickstep to the question of a 'way forward'. A credible political solution, therefore, appears to be as elusive as ever.

Professor Noriyuki Shutto

Soon after we were informed last week that Prof. Noriyuki Shutto was in Colombo, the Sunday Times FT succeeded in catching up with him at the Cinnamon Grand. At an exclusive tête-à-tête, Prof. Shutto expounded on the Japanese way of communication and product branding.

For The Uninitiated…
Prof. Shutto is Director of the International Advertising Association (IAA) for the Asia-Pacific Area, and has wide international communications experience. The IAA is a partnership between the media, the agencies and clients.

Having joined Dentsu Inc., Japan - the world’s fifth largest communications orgnisation - in 1970, Prof. Shutto went on to become its CEO in 2001. He is now Executive Advisor of the organization. He also teaches at Kyushu University, but is quick to point out that he is "a practitioner, not an academic”.

As much as 85% of Dentsu’s revenues come from Japan. Cultural and language barriers have prevented Dentsu from establishing a more formidable presence in Europe and the US. This does not worry Prof. Shutto because many Japanese companies are globalised; Toyota, Sony, Honda and Panasonic being cases in point.

Prof. Shutto Freedom says that cultural taboo and political pressure sometimes curb freedom of commercial speech. He firmly believes all three parties – media, agencies and clients – should exhibit social responsibility rather than be ordered by the government. “Self-regulation and freedom of advertising are one composite package,” he says.

On Internet Advertising
In Japan, interactive/ internet advertising is bigger than radio or magazine advertising – and stands a creditable third after television and newspaper. “According to western theorists,” says Prof Shutto, “the communications market is a zero-sum market.” He debunks this theory by pointing out that internet marketing is ‘viral’ in nature. Viral marketing utilizes individuals to pass a marketing message to others, creating exponential growth in the message's impact.

“While internet advertising per se is not so costly, creating value on the internet could be very expensive”, says Prof. Shutto. He cites BMW’s commercial featuring Madonna as an example. Although over a US$ 1 million was spent on this campaign, it was aired only on the internet, not on television.

On Corporate Ownership
Another notion among the Japanese is that companies belong to the employees rather to the shareholders. This has resulted in greater corporate involvement with products than is the case in the US. “Hence”, says Prof. Shutto, “the Japanese are naturally inclined towards corporate advertising. Toyota gives you the Toyota Camry and the Toyota Corolla, bundled with the implicit assurance of the manufacturer.”

US manufacturers, on the other hand, pride themselves on the product itself. Hence, General Motors gives you the Cadillac, Buick and Chevrolet – each of which is an independent brand. Even in the FMCG space, Procter & Gamble comes to mind: Pantene and Head & Shoulders do not flaunt their parentage.

On Cultural Subtleties
Japanese tend to consider individuals in relation to their families, and Japanese communication is based on this culture. In Japan, therefore, says Prof. Shutto, “messages tend to be indirect or emotional, and are sometimes communicated to individuals through society.”
Anglo-Americans, on the other hand, are perceived as independent entities and messages tend to be more direct. Public awareness advertising like for gay and lesbian rights is visible in the US, but is unthinkable in Japan.

Chicken Biriyani & Other Indian Tidbits

An aura of optimism mingled with the aroma of chicken biriyani when India’s High Commissioner Alok Prasad emphasized that India wants Sri Lanka to “get maximum benefit out of the growth process in India.” At a luncheon meeting held at the Taj Samudra last week, prospects of heightened Indo-Lanka trade never looked brighter. The event was organized by the Indo Lanka Chamber of Commerce & Industry.

Having worked in the Office of the Prime Minister, Prasad has been closely involved with India’s reform process and is well equipped to talk about economics and growth. In his maiden engagement with the business community here, he came across as an erudite economist and a champion of free trade.

In an incisive and enlightening presentation, Prasad narrated the story of India’s transition. A plodding 3% annual growth rate during the first three decades since independence had earned it the disparaging sobriquet, ‘Hindu rate of growth’. Since 1991, when economic reform and liberalization took effect, however, growth has been twice as fast.

What appears to be even more exciting is that growth is accelerating, with the current year expected to record 9.2%. India is planning to use its foreign exchange kitty of US$ 180 billion to accelerate growth further..! To revitalise the agricultural sector to a 4% growth trajectory, Prasad indicated that there would be “public investment where you have to, private investment where you can”.

Prasad pointed out that India’s qualitative and fundamental shifts have been supported by remarkable macro economic stability. Growth has resulted in a wider dispersion of prosperity, with poverty having declined from 36% to 25%. In an interesting comment, Prasad also mentioned that, in a country where the price of onions can determine changes of government, India is concerned at the prevailing inflation rate of 6.73%. One could not help comparing that to Sri Lanka’s inflation figure which is thrice as much, but is generally looked at with a sense of resigned acceptance!

In a voice tinged with justifiable pride, Prasad spoke about Indian companies’ overseas acquisitions: Tata Steel’s takeover of Corus and Dr Reddy’s Labs’ acquisition of Betapharm, among others. He also waxed eloquent on progress in India’s telecom sector, where mobile connections exceeded fixed line connections last year.

Prasad repeatedly emphasised that there would be greater integration with global markets, including those in the immediate neighbourhood. Striking a note of caution, he said, “The Indian reform process has been gradualist - and this style will continue.”

Sri Lanka was India’s largest trading partner in the region during 2006, with total bilateral trade of US$ 2.3 billion. Commenting favourably on the healthy improvement in Sri Lanka’s Import-Export ratio from 15.7:1 (1998) to 2.5:1 (2005), Prasad expressed a keen desire to build on this trend. He believes that the CEPA will be an effective instrument to give bilateral trade, which was ‘relatively flat’ during 2006, a further impetus.

With both nations determined to take the Comprehensive Economic Partnership Agreement forward, India is committed to reducing the negative list. In addition, Prasad assured the gathering that services would be included, unintended tariff barriers would be streamlined, and customs co-operation would be heightened. He went on to say that there would be an improved chapter on avoidance of double taxation.

India’s growth has come with some degree of churning; not more than 30 companies in India’s latest ‘Top 100 Companies List’ were present on the 1991 list. In response to a question, Prasad informed the gathering that the dismantling of trade barriers inevitably leads to a shakeout. However, in the long term, he said, “Industries will have to stand on economic viability alone.”
Indian industry has undertaken that journey and emerged “stronger, more efficient and more internationally competitive”. Sri Lanka probably needs to do likewise.