Why Sri Lankans aim low

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

Over the years, a lot of weight has been put on building “aspirational Sri Lankans”. Different terminologies have been used to define them; however, the core group of the so-called aspirational Sri Lankans remains the same – “intellectuals”, “business professionals”, “young professionals”, and “members of professional movements”. The key question then is what makes aspirational Sri Lankans aspirational, and why have they been unsuccessful in placing Sri Lanka back on the map?

Where are our aspirations?

Many Sri Lankans aspire to build a house, buy a vehicle, and probably have a grand wedding and proceed on to provide a good education for their children. Achieving these aspirations continues throughout their lifecycle. Then, the next generation takes the baton and runs the same race. This is the constant marathon run by our “aspirational Sri Lankans” for decades.

The serious question we need to ask ourselves is why basic needs such as housing and transportation have become aspirations for the average Sri Lankan in the 21st Century. Moreover, attention should be given to the opportunity costs of obsessing over housing and transportation by these “aspirational Sri Lankans” – what could be achieved if this was not the case?

Why people consume capital by building a house

While it is true that the financial literacy of Sri Lankans is low and that we have failed at the formation of capital due to excessive consumption from our initial capital instead of investing, we also need to investigate the economic rationale behind such behaviour. The reason as to why basic needs such as housing have become a distant dream to the average Sri Lankan is deeply rooted in the distortion of prices in the housing market due to the implementation of misguided economic policies. Most of the construction material in Sri Lanka is far more expensive than the prices of the said material in the entire region. The total tax Sri Lankans pay for imported steel ranges between 19% and 64%.

The tax on imported tiles ranges between 19% and 93%, and at present, the Government has imposed a temporary import restriction on tiles and sanitaryware, driving the prices of local goods up. Anyone who has attempted to build a house would know how ridiculous the prices for light fittings, curtains, aluminium, and other material are. Sri Lanka also has a shortage of skilled labour, and finding a mason or a furniture craftsman is not only difficult but also expensive. They have become expensive on the basis of productivity. If you are wondering why Chinese labour has expanded beyond large-scale construction to small-scale residential construction, the answer is rooted in productivity. Chinese labourers are five times more productive (according to an in-depth interview conducted by the author with an apartment builder) than the Sri Lankan labourer.

High import tariffs and import bans have led to skyrocketing domestic prices, and now the simple transaction of buying or building a house has become a lifetime dream of the aspirational Sri Lankan. If you ask a banker for their reason for remaining in that job, they will tell you that it is the concessionary “housing loan’” and “vehicle loan” that attracted them. While a fortune will be spent on building a house, there will be limited funds to explore better education opportunities, hereby pushing the tertiary education of young professionals to the grave due to extra prices paid for inefficiencies in housing.

The existing land issues, the inability to transfer properties, and lack of property rights have made the situation worse. So in real terms, the “aspirational Sri Lankan’s” capital that they couldn’t invest for returns was not invested in their house, but rather in the extra price they paid for construction. More importantly, potential aspirational Sri Lankans are expending valuable energy in trying to overcome the consequences of these misguided economic policies.

Where is the capital for the vehicle?

It is no secret that Sri Lanka’s vehicle market is one of the most distorted markets. Based on the usage of the vehicle, the value increases, and we pay exorbitant amounts of tax at the point of importing a vehicle. Making things worse is the vehicle permit system that is only available to VVIPS and few professions.

So what is the incentive to be an aspirational Sri Lankan? Is it to take the risk of investing the capital and trying to consume from the yield, allowing the capital to multiply, while lobby groups and politically connected pressure groups not only get a vehicle permit but also the legal blessing to sell despite tax losses to the government?

The permit culture is not only in buying vehicles, but it is also in the public transportation system where route permits for public transportation are more expensive than the bus itself, even though the cost of a bus is multiplied several times over when you factor in the tax.

Yet again in the real world, the aspirational hardworking Sri Lankan’s capital, which they never invested (which they did not have the knowledge to invest), gets gobbled down in distorted markets that are protected from competition. 

Even when looking at leisure and recreation, the cost of recovering capital invested in the construction of a hotel is passed on as room rates at prices that are higher than those of similar destinations in the region, because of our high cost of construction. At weddings, the costs of the food they serve, electrical appliances, storage, and prices of cutlery, liquor, etc. are added to the final cost of a plate at a wedding. Hence, there is no alternative but to eat away at the capital that belongs to the average aspirational Sri Lankan. 

It is true many Sri Lankans get into this trap by trying to live beyond their means, spending lavishly at weddings, building bigger houses than they require, and buying vehicles due to a lack of financial literacy. But the reasons why artificial value has been created for basics such as housing and commuting is misguided economic policies.

What young entrepreneurs chase as aspirations are not the real aspirations that could put Sri Lanka back on the map. The very reason for this is that our prices do not indicate the true value of the product or service and the real value it offers. The concept of “price” is of paramount importance. It is the single indicator of value, resource scarcity, productivity, supply, demand, and so many variables that are all encapsulated in that single number called “price”.

When governments and policies intervene in demarcating prices, the price set is a result of people chasing the wrong things and the entirety of society has to bear the cost and loss of it.

What we need is to set a culture of hard work and free exchange where young entrepreneurs are provided with a level playing field, right incentive structures, and motivation to be productive and innovative – that is the real expectation of the aspirational Sri Lankan which has now been shadowed by glittery basics such as housing and buying a vehicle. Until we work towards that, we will not be able to see a new Sri Lanka nor will aspirational Sri Lankans ever prosper.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Why ‘banning culture’ is no solution

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

Last week, the Government proposed a ban on sachet packets as a measure to protect the environment. And now, another proposal has been tabled – banning the slaughter of cattle. This is not the first time such strict measures have been imposed by consecutive governments, but it is paramount that we understand the economics and unintended consequences behind “banning”.

Before we jump to any conclusions, let’s just take a look at the results of similar policies adopted in the past, to get a taste of this “banning strategy”.

Previously, we saw a proposal to ban polythene below 20 microns in thickness to protect the environment and it was not too long ago when the former President announced a ban on chainsaws and carpentry sheds. A simple visit to the market is sufficient to demonstrate the extent these banning mechanisms have been productive.

Earlier this year, the Government learned a bitter lesson on imposing “price controls” (which is sort of a ban on selling at high prices) on tin fish and dhal. The price controls had to be revoked due to obvious market disruptions. Prices shot up, and there were shortages in the market, which was the complete opposite of what the Government intended.

A common belief is that the “banning strategy” often fails or is less effective due to poor implementation. This is far from the truth. There is very much a market and an economic dimension that show the concept in itself is flawed, which we often fail to understand.

Emotional policymakers often get the art of public policy drastically wrong. They view it through an accounting lens due to a lack of knowledge on human behavioural economics and the presence of the concept called “markets”. As a result, all good intentions result in far worse consequences.

Ban on sachets

The concept of sachets was introduced by FMCG (fast-moving consumer goods) market players on the basis of affordability and as a measure of resource allocation. Someone who cannot afford a full bottle of shampoo or any other equivalent product can use a sachet as a one-time useable product, based on the requirement. This is easy on customers’ wallets and provides value for money.

A good reason why sachets are predominantly available in general trade and mom-and-pop shops as opposed to modern trade is its easy access and affordability for the poor. On the other hand, from the manufacturer’s end, sachets help to allocate raw materials effectively and allow them to reach the market.

According to a recent article by Dr. Rohantha Athukorala, a Neilson Survey revealed that people have reduced the usage of baby soap by 18% and adult soap consumption by 17%. This indicates how people who find it difficult to manage their finances resort to eliminating basic hygiene products like adult and baby soap due to unaffordability. Cutting down on baby soap indicates a booming cost of living problem which goes beyond soap usage.

The ban on sachets will be a double whammy for most vulnerable people in society who are voiceless. All FMCG companies spend an enormous amount of money before they launch any SKU (stock-keeping unit), and we need to understand this was a market demand.

A sudden decision without prior engagement with the industry and relevant stakeholders will push manufactures to an extremely difficult situation, which will demand them to realign their manufacturing and marketing strategies in an already challenged Covid-19 economic environment. We have often forgotten that polythene is a wonderful innovation, and where its hydrocarbons are recycled to produce electronic chips and fabric.

MAS Holdings manufactured a special fabric for our cricket World Cup team with marine plastic waste which received global recognition. This can be utilised as an effective example to understand that the prime need is for setting up proper recycling methods coupled with incentives and disincentives.

Already, the discussion is heated on serious environmental concerns such as that of the Anawilundawa Wetland Sanctuary and many other places across the island, as highlighted through this column last week. The Government has to keep an eye on more macro issues pertaining to environmental protection rather than obsessively focusing on micro issues. These “banning strategies” will dilute the Government’s well-earned political capital, which will make hard reforms difficult in the coming years.

Import controls

Import controls are another form of ban on a temporary basis. The Government’s urgent need to manage its Balance of Payment (BoP) crisis is understandable. However, this requires a series of different actions coupled with temporary solutions such as bailout programmes from the IMF (International Monetary Fund) and clear policy decisions to help make our exports competitive.

Import controls hurt exports as the prices of import substitutes rise, especially where the goods are used as an input for the production of exports. In addition, import substitutes become more profitable to produce than exports.

The result of the current import ban is highly likely to affect our existing exports, as we have indicated in this column multiple times. Already, people are struggling to buy phone chargers, repair washing machines, and purchase goods which are required on a daily basis. We are running on existing stocks which will expire soon and prices have already started going up.

On the other hand, in our import bill, the big-ticket item is fuel and essentials such as pharmaceuticals, which are very difficult to control. The General Hospital has already announced a shortage of 70 essential drugs. These drugs are used to treat diseases such as Thalassemia and heart-related conditions.

However, trying to cut corners of other imports carry the potential to distort various other markets, businesses, and value chains horizontally, vertically, upstream, and downstream due to price hikes.

Prices of vehicle tyres and spare parts have shot up, which will have an impact on all goods and services with a transportation cost component. At one point, the collective effect of the rising cost of multiple consumable goods and intermediary goods may go beyond people’s affordability.

Releasing import controls at this point would be too late, given the situation of our currency. The higher cost of living will impact labour prices and most of our value addition in exports which are in the form of labour will be uncompetitive over a period, which will affect our main exports such as apparels, tea, and rubber products. In economics, the need is to take a look at the market from a holistic perspective. Otherwise, similar issues will arise over and over again.

The best example is higher prices requested by the poultry industry and the bakery industry. Sri Lanka’s maize production is not at all sufficient for domestic consumption, which is the main source of food for poultry. As a result of higher prices of maize, the prices of poultry products have shot up, which will have an impact on the bakery industry. Now you have a happy maize farmer but an unhappy poultry farmer and a baker. Eventually, this will translate to an unhappy consumer and a very unhappy voter.

Ban on slaughtering cattle

Adding to the banning spree, the proposed ban on slaughtering cattle is the latest. This may cause more damage rather than being helpful for the protection of cattle in Sri Lanka. However, the Cabinet Spokesperson mentioned the proposal was postponed by one month so as to allow for discussions with the relevant stakeholders.

Though the proposal may have been put forward with good intentions in terms of animal cruelty, India is a good example of how such policies don’t work. Cattle owners in India are left with no option other than to resort to the creation of illegal and unsanitary slaughtering houses and illegal markets.

Keeping aside the logical fallacy of placing a ban only on the slaughter of cattle and not the entirety of the poultry and meat industry, and the justification of leaving domestic demand to only be met through the importation of beef, the matter goes far beyond that.

The beef industry does not exist in isolation; our leather industry, dairy industry, and leather exports are also dependent on it. According to the Export Development Board (EDB), in 2016, about 1% of total merchandise exports consisted of footwear and leather products, which has now dropped to 0.6% of our merchandise exports.

According to the EDB, there are about five large companies, 10 medium-scale companies, and more than 1,000 small enterprises and seven tanneries that produce 25 tonnes of leather every day.

If passed by Parliament, this proposed ban on cattle slaughter will prevail at the expense of 1,000 small enterprises and exports worth $ 550 million. While animal cruelty is of grave importance, sometimes in life we have to keep some markets for the greater good and to avoid much greater negative impacts.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.