Economic recovery 2021: Why innovation and export orientation matter

Two thousand twenty-one will be a difficult year. For most economies – not just for Sri Lanka. One does not have to be a macroeconomist to predict that. This year carries a legacy from 2020 that has brought unprecedented economic shocks as the consequences of a world pandemic situation, unknown at least for 100 years, the last such incident being the 1918-19 Spanish flu. 

Many economies, large and small, developed and developing, in all inhabited continents were locked down for weeks and months in 2020, bringing their economic activities to near zero levels. Livelihoods were severely threatened. Governments had to support the populations through budgetary stimuli. Billions of productive hours have been lost. Many economies have recorded sub zero growth rates. 

The year 2021 has been recognised as the year the world would make a ‘V-shaped return’ – certainly not to its pre-COVID status or anywhere close but a level a bit more comfortable. Nobody is certain how exactly an economy achieves that, simultaneously fighting a global pandemic and attempting to meet the unmet targets for the previous year. 

Still, at this point, success is not a choice. The ‘New Normal Economic Divide’ will be created not by COVID-19 but by the incapacities of nations to overcome the current situation. In other words, the new line between developed and developing nations is being drawn at this very moment that way they act to recover from the 2020 shocks.  
Traditional approaches: They cannot 
take us far
Certain symptoms are common to any economic crisis. For example, the money value drops. What one can buy for the notes in hand becomes increasingly limited with time. Unemployment hits the ceiling. “We are hiring” ads gradually disappear. We let jobs go. Pay cuts become common. New business opportunities will vanish. 
It was in such a time, during the Great Depression of 1930s, Keynes challenged neoclassical economics ideas, saying that free markets can provide full work only until workers were flexible with their wage demands, in the short to medium term. He argued that aggregate demand (total economic expenditure) refers to the general level of economic activity and insufficient aggregate demand could lead to long periods of high unemployment. Then he proposed the use of monetary and monetary policies to mitigate the harmful effects of economic recessions and depression.    

Interesting that we remember Keynes only when in trouble. Whether one likes to admit it or not, Keynesian economics are already at play around the world, supporting the ailing economies – in a process what its opponents harshly call ‘printing money’. 

Lee Hsien Loong, Singapore PM, in his speech to the World Economic Forum (WEF) recently acknowledged the role of central banks worldwide assisting economies through stimuli and similar arrangements. This kind of hand-holding does help but that will only be postponing the crisis. We cannot go on forever. We have to find another way out and of course, before the very impact of such measures pressurise us. Hard decisions are to be made. Better sooner than later.

Fighting COVID-19 is no more just a local need
COVID anywhere – COVID everywhere. This was a lesson we took too long to learn. In the first phase, the unspoken philosophy was to grab and wear whatever the oxygen mask one finds, leaving the rest to look after themselves. Initially it looked like working perfectly. Sri Lanka was jubilant on beating the first wave – till we were hit by a Ukrainian strain harder. 

Then we, as a society, unashamedly went after charlatans and sorcerers offering this ‘Peniya’ and that to become the laughing stock for international community. Fortunately, it didn’t take long for them to fail, proved to be nothing better than cows’ urine. In a way, that was good as it forced the government to take a scientific approach, encouraging the masses to get immunised. 

In this immunisation exertion we are not alone. Countries that developed the vaccines were quick to distribute them to others, making them accessible to everyone – be them large or small, rich or poor, industrialised or not. It looks like generosity but more a recognition by world powers the need to fight COVID-19 as a single global family. 
Vaccination attempts can be seen as excellent examples for solutions, both innovative and collaborative. It is not just a question of developing vaccines. Vaccination of the global population is a long and complicated multilateral exercise. Authenticity of tests and vaccination will be a must for the recommencement of international trade and travel in near future. 

COVID-19 restrictions can be progressively eased with the success of these efforts. (Explains why developed nations are so concerned about universal vaccination.) This could be our starting point. Why not model our economic solutions on the same model, with two key features in mind – sharing and innovation?

Innovation: Why it matters at this specific juncture
Innovation always plays a role in staying ahead of competition. It is about new markets and nouvelle technologies. Steve Jobs could have presented his machines with monochrome monitors but he introduced colour with a Graphical User Interfaced OS, advancing the entire industry. This happened during a period that could be termed ‘normal’. 

Faced with a catastrophe innovation plays a bigger role as the environment itself swallows the traditional low risk takers. Ask those whose livelihoods are already taken by the pandemic, forcing them to sell ‘pol-rotis’ with pork at the wayside to pay vehicle leases.     

So, what kind of innovation do we talk about? Simple. Think about all business opportunities lost. What could have brought them back to normal? Let us start with the tourism industry. Worldwide international travel trade is seriously curtailed by the pandemic for nearly a year. Certainly no way to go back. Appear different solutions. Sri Lanka’s ‘bio-bubble tourism’ is just one example. Ideal would be pre-planned itineraries, where tourists least interact with the locals. 

The logical next step would be allowing travel only for the vaccinated. From the host end, the staff could be vaccinated with a priority. The end product will not come anywhere near the original but something is obviously better than nothing. Further, it could develop to an entirely different model with time, assuming COVID-19 will stay for few years to come.

Why stop there? Innovation can come in all shapes, sizes and colours. When local private tuition masters could not gather students in the post-COVID 19 environment, they promptly moved online, with customisation. Now students are free to access any class of their choice, at convenient times and rates. They do not necessarily have to make monthly payments. If they wish, they can attend even a single class, making an online payment. Innovations in education services introduced in 2020 will stay for a long time to come, even after COVID-19 would be history. 

These are just few micro level examples but the same can also be extrapolated to macro level. An international crisis sometimes happens to be a zero sum game. There will be both losers and winners. Taiwan, in 2020, hit China in growth, after 30 long years. While the larger vessels sink, tiny boats might survive a storm.  

Riding on start-ups wave
Start-ups, by their very nature, are tech savvy and open to new ideas. They are the test beds for experimentation. A start-up that creates a sustainable competitive advantage is truly innovative. Launching a business that provides value in the present is difficult enough but the ability to carve out a niche in the future shows true innovation. Between the inherent resource constraints and inevitable competition from established businesses, this task is exceedingly tough. 

Thus, many start-ups reinvent an existing product to market to changes in the way society consumes, purchases or behaves. But what makes lasting companies innovative is a willingness to disrupt themselves. Amazon is a great example with the Kindle, disrupting its own sales of hard-copy books – so is Netflix, pushing streaming to replace its DVD rental business. 

Start-ups do not grow in a vacuum. Governments constantly need to provide a conducive ecosystem for them to nurture. Sri Lanka has been successful so far with a frequent and healthy dialog with tech start-ups that resulted in additional measures for creating opportunities. 

In October 2020, the Finance Ministry guided all state establishments to procure their software requirements below Rs.2 million, exclusively from local start-ups. With the government as the single largest client, this could be the biggest boost the industry received in recent times.  

Export orientation is equally essential
Globalisation, in the post-COVID-19 era, is already under pressure. Let’s borrow this excellent observation from Loong – another gem from his speech to the WEF. He sees COVID-19 moving economies more towards protectionism and nativitism. This was so bad, says he, that initially countries had to produce their own masks and PPEs – nobody was willing to share theirs with others. 

With supply chains being badly disturbed, everyone took the prevention measures into their own hands. Regional and global efforts were hardly thought about, either in prevention or economic recovery attempts. This mindset is now gradually changing. 

Loong recognises the trade agreements Singapore entered with three like-minded countries – New Zealand, Chile and Australia, as examples of Singapore’s efforts in rebuilding post-COVID-19 digital economy. This is exactly what other nations might look forward to. 

The economic recovery, just like COVID-19 prevention, is a shared global exercise. Each country has its own role to play, no doubt but for success, everyone must act together. If trade barriers are what prevent that initiative, this is the right time to remove them.

Cross-Border E-Payment Systems, another term to borrow from the Singapore Prime Minister. This is one sphere every country must focus on building in 2021. Cross-Border E-Payment Systems create more business opportunities for vendors, more competitive and affordable choices for consumers. We must let the global supply chains moving and map ourselves, as individual economies, to where we are most productive. 

The other option is protectionism, which has already proved to slow down economies rather than speeding up. So, opening up, at every level, is the viable alternative. Governments have a key role to play here. At a basic level, freelancers must receive more opportunities – what has already been there are drying up as our South Asian neighbours try too hard. 

Sri Lankan freelancers and micro-workers still pay high discount rates for money transfers. At higher levels, manufacturers must receive raw materials with least tariff and administration barriers and support to market their products worldwide. 

Sri Lanka’s only way forward
One can say Sri Lanka, as a small economy, is probably in a worse situation compared to larger economies. There are arguments for and against this. Large economies have their own markets that could be exploited in regaining what’s lost. Our own market, for that, is too small. 

Sri Lanka has no choice other than expanding its export market. Sadly, this is one area we have not seriously deliberated since independence. Perhaps this is the time to take a plunge. 

There are bottlenecks, though. Whether we like to believe it or not, Sri Lankan society at large still entertains a strange xenophobia, which can be traced back to centuries, if not millennia. As seen in the case of East Container Terminal, our gut feeling is to avert foreign investments, not to invite them. We see trade agreements as traps. 
We are also against foreign low-cost labour while factories run at half utilisation for the lack of manpower. Basically, we are against anything that can be termed ‘foreign’. We can hardly go far with this narrow mindset. 

COVID-19 knew no geographical/political boundaries. Neither does supply chains. Mapping ourselves with international supply chains requires we overlook our petty cultural differences, if any and take business for business. Sri Lanka had the guts to sign a trade pact with China in the early 1950s to barter our rubber for their rice, still being a strong member of the Commonwealth. During British colonial period we had no issues when South Indians came here for work. So why this aversion now?       

Sydney’s Lowy Institute recently assessed almost 100 countries on six criteria, including confirmed cases, COVID-19 deaths, testing metrics, etc. and ranked Sri Lanka 10th most effective in handling COVID-19 pandemic. This is good news. Our current position is not that bad. Nonetheless, that does not necessarily mean we have an easy way out. Whatever the way we take, its key components should be innovation and export orientation. 
(Chanuka Wattegama, an academic/policy researcher, can be reached via [email protected]. Opinions 
expressed here are personal)