Talk ng Econom cs Digest

July-December 2012

INNOVATION
A Publication by the Institute of Policy Studies of Sri Lanka

SPECIAL ISSUE

Editors Desk
March 2013

P2 Mind the Gap: Where Will Sri Lanka Find the Money to Finance its Development Needs?

P8 Greening Jobs:Getting Things Started P9 Public Health: Healthy Public Policies Begin with Health in All Policies
Average University Students in Sri Lanka Graduate 3 Years After Their Peers in the West
UK

P13 Oop(s);Struggling for equity in Sri Lankas Health Sector Amidst Rising Out of Pocket Expenditure P15 Giving Tourism a Green Shade: Studying Environmental Practices in Sri Lankas Hotels P16 Gender Equality in Human Development; Whats Holding Sri Lanka Back?

P18 Global Trade Protectionism is Rising Discreetly Sri Lanka Must Stay Alert

USA

Sri Lanka

P5 Economic Freedom and the Asian Century P7 Fiscal Imperatives for Growth and Stability

A year in School

A year in University

A year of Idling

P11 Lankan University Graduates:Late Birds, No Worms?

P20 Economics of Global Climate Change New Innovations on Mitigation, Adaptation and Research

Sri Lankans have proven to be a creative and innovative group of people. Whether in the past - the world-leading irrigation systems during the reign of the Kings-or more recently - the trailblazing telecom industry that beat India in introducing GSM and 3G Sri Lanka has proven itself. But our priorities seem to have shifted lately. The structure of the economy, and consequently the interests of the workforce, appear to be shifting more towards domestic non-tradeable activities like construction and retail, taking the focus somewhat away from export-oriented manufacturing and services, as evidenced from published trade statistics. The Sri Lankan economy cannot achieve faster growth, and sustain, it without a heavy focus on exportable knowledge-driven economic activities with innovation at its core. In an increasingly troubled external economic climate Sri Lanka will need to develop world-class products by a world-class workforce. The importance of STEM subjects (Science, Technology, Engineering, and Mathematics) in building this workforce is now firmly on the education agenda globally. It is recognized that gearing a workforce towards an innovation-driven economy means giving young people an enhanced STEM education. While the e-Sri Lanka initiative has certainly helped bridged the digital divide, the situation of Science education is alarming. Nine out of every ten schools in the country do not have the facilities to teach science stream subjects at A/Ls. Young boys and girls living as far off as Anuradhapura, Kantale and Vavuniya are travelling to Kurunegala to attend A/L science tuition classes. Sri Lanka spends less than 0.2% of our GDP on research and development each year, while our competitor countries spend nearly 3-5%. Many people are quick to declare the end of US preeminence in the global economy. But I would argue differently. A major reason why the US will still prevail is because of innovation and the agility and adaptability that come with it. Publishing nearly 300,000 scientific journal articles each year, registering over 700 patents every day, and commercializing inventions at a faster rate than anywhere else, the US will remain the worlds innovation leader. We are pleased to bring you a discussion of these issues and more in this Talking Economics Special Issue on Innovation. IPS is leading the discourse on this area, producing new insights and policy recommendations in both the 2011 and 2012 editions of the Sri Lanka: State of the Economy report and releasing a Working Paper on innovation in December 2012. In the latter, the authors call for the setting up of a National Innovation Council to drive the innovation agenda at the highest levels of government. This Special Issue has a compelling cross-section of content from guest articles by the pioneers of Sri Lankas nanotechnology initiative to interactive feature articles on venture capital and techno-entrepreneurship by the editorial team. As always, this issue of the Digest also contains insights by IPS researchers on many of our focus areas fiscal policy, human development, public health, environment, climate change and international trade. The innovation discourse is relatively new in the Sri Lankan policy space. Innovation is multifaceted and Sri Lanka doesnt need to follow a set course in how the country engages with it. Yet it is clear that there needs to be a step-change in our priorities. While sectors like tourism certainly offer low-hanging fruits capable of delivering quicker prosperity island wide; sustained, rapid and dynamic growth will only come from a ruthless focus on innovation. A Sri Lanka that ignites the fire of innovation across sectors and across regions will be a vastly different Sri Lanka to one that chooses to follow a more conservative business-as-usual path. This new fire of innovation must be ignited by every corporate boardroom and every government agency. This fire, if ignited without delay and without exclusion, can power Sri Lankas ambitions of greater prosperity for its people. Anushka Wijesinha Editor Talking Economics (Research Economist, IPS) anushka@ips.lk

a New Fire

Igniting

TALKING ECONOMICS www.ips.lk/talkingeconomics

EXECUTIVE DIRECTOR Saman Kelegama, DPhil (Oxon) DEPUTY DIRECTOR Dushni Weerakoon, PhD (Manchester) TALKING ECONOMICS TEAM Anushka Wijesinha Editor Charmaine Wijesinghe Appekka Fernando Nalaka Liyanapathirana DESIGN/LAYOUT Shafraz Farook Consultant Designer (Kalambo Active Pvt., Ltd) Anushka Wijesinha CONTRIBUTING AUTHORS Ashani Abayasekara Dr. Nisha Arunatilake Samanthi Bandara G. D. Dayaratne Harshanee Jayasekera Sunimalee Madurawala Chatura Rodrigo Dr. Dushni Weerakoon Kanchana Wickramasinghe Anushka Wijesinha Tehani Welgama IPS GUESTS Dr. Razeen Sally Prof. Ajith De Alwis Prof.Veranja Karunaratne Prof. Gehan Amaratunga Dr. Harin De Silva Wijeratne Shalini Dharmawardena

P22 INNOVATION - Special Issue

P23 Innovation, Invention, R&D; Breaking Down the Concepts P24 The Narrow Human Resource Base in Science and Technology Could Constrain Sri Lankas Knowledge Economy Ambitions

P28 Supporting Start-Up Enterprises

P36 States Role in Boosting Nanotechnology P38 Our Take

A somewhat different take by the editorial team on why three things that are sometimes seen as challenges in Sri Lanka could in fact be opportunities for innovation, if harnessed cleverly

P30 Firm Look

A look at some of the worlds top brands and what innovation means to them and what is has meant for their stellar business performance...

P39 Private-Public Partnership for Innovation: Case of SLINTEC P40 Fresh View
Four young tech leaders give us their perspective on innovation. Scan the QR codes on the page to watch their full interviews

P26 Nanotechnology in Sri Lanka: A New Beginning with a New Technology but Commitment is Key

P32 Driving Manufacturing and Export Competitiveness Through an Innovation Focus P34 Towards More Science, Research and Innovation in Sri Lanka

Institute of Policy Studies of Sri Lanka 100/20, Independence Avenue Colombo 07, Sri Lanka Tel: +94 11 2143100, +94 11 2665068 URL: http://www.ips.lk Blog: Talking Economics www.ips.lk/talkingeconomics Twitter: www.twitter.com/TalkEconomicsSL PRINTING Karunaratne and Sons (Pvt) Ltd. 67, UDA Industrial Estate, Homagama, Sri Lanka

P43 Talking Economics Expert Voices Panel Discussion on The Jobs Challenge

P44 IPS News

P46 Staff Spotlight: The Innovative Librarian

P47 Fast facts

2 TE DIGEST Jul - Dec 2012 Research. Inform. Impact.

The Institute of Policy Studies of Sri Lanka (IPS) is an autonomous institution that aims to promote policy-oriented economic research and to strengthen the capacity for medium-term policy analysis in Sri Lanka. Its mission is to contribute to the socio-economic development of the country through informed, independent and high quality research that seeks to influence the policy process. With over two decades of substantial research expertise, IPS has emerged as a regional centre of excellence and the most influential think tank in Sri Lanka.

Copyright and Disclaimer All material published in the Talking Economics Digest are the copyright of the Institute of Policy Studies of Sri Lanka (IPS), unless otherwise specified. It cannot be quoted without due acknowledgement to the IPS and the author. It cannot be reproduced in whole or in part, without the written permission of the IPS. The content, comments and posts of the Talking Economics Digest and the IPS blog represent the views of individual authors and do not necessarily represent the views of the IPS.

Jul - Dec 2012

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Development Finance

The head of a UN agency reported that the funds we have traditionally accessed have contracted by 70%; while a leading European bilateral donor indicated a more than 60% contraction in funds between 2009 and 2011.

and rehabilitation efforts. In this backdrop, strengthening the spending capacity of the state, to finance the bridging of the gaps and the provision of social services is vital. Contracting Foreign Aid This situation is changing, as Sri Lanka moves into middle income country status. The country is becoming increasingly less eligible for concessionary loans from sources like IDA (International Development Association) which carry low interest rates, long tenors and grace periods and a high grant element - to finance its public investments1. IPS spoke with several aid missions. The Deputy Head of Mission of a leading European aid donor told me that, Since 2010, Sri Lanka no longer qualifies for bilateral development assistance due to the Low Middle Income status of the country. This sums it up well. Many of the aid donors surveyed noted that in the last 2-3 years there has been a reduction in their funding to Sri Lanka (mainly due to contraction of humanitarian assistance, but extending to development assistance too), and this trend is likely to continue. They noted that the changes have been in: the volume of the funds received/disbursed; the type of funding; how the funding is being allocated and the nature of projects; and the sources of the donors (countries/agencies) themselves. They added that the top reasons for these changes/ reductions were: change in the countrys economic situation (MIC) and change in the types of needs, economic growth of the country, status of the global economy. The head of a UN agency reported that the funds we have traditionally accessed have contracted by 70%; while a leading European bilateral donor indicated a more than 60% contraction in funds between 2009 and 2011. Another UN agency chief remarked that in 2012, [institution name removed] has only been able to resource less than one third of what it mobilized from donor sources in 2009. Meanwhile, a leading donor agency added that [as] Sri Lanka graduated to a middle income country, many donors feel that there is some responsibility on the part of the government to undertake a larger role

Development Gaps and State Capacity The Sri Lankan state continues to be a key provider of social services, such as education and health but has been invested less and less in both sectors over the years. Investment by the Sri Lankan state in education is low and has declined steadily over time. Public expenditure in education has averaged at 2.3% of GDP during the 2000 to 2010 period, falling to a 10year low of 1.9% of GDP in 20122. This is smaller than the average of middle income countries. As a percentage of GDP, the average upper middle income country spent 5% of GDP, and the average lower middle income country spent 4% of GDP on education. Meanwhile, access to better schooling facilities is grossly insufficient, with only 10% of all schools in the country able to offer A/L science, and those, too, concentrated in urban areas only. Similar issues prevail in the health sector. Health investments by the Sri Lankan state have reduced, threatening to compromise the impressive gains made in the past. Total expenditure on health remained below 5% of GDP between 1995 and 2008, and is low compared to the global average of around 8%. Within this, the contribution from the state was only around 45.8% (2009) the rest came from private sources (private sector health providers as well as Out-Of-Pocket-Expenditure OOPE). The proportion of out-of-pocket expenditure (out of private health expenditure) has grown remarkably over time - Sri Lankans spent Rs. 70 billion more out-of-pocket on healthcare in 2009 than 20 years ago. Tackling the development challenge of building a skilled and healthy workforce crucially hinges on investing more in health and education. Funding this will now depend more than ever on government finance through tax revenue. Financing Human Development: Taxation Imperative One way of financing it is through loans - Sri Lanka has, of late, been increasing its volumes of borrowing from international debt capital markets. But as highlighted in the forthcoming State

Mind the Gap:

Posted in november 2012

Where Will Sri Lanka Find the Money to Finance its

Development Needs?
As Sri Lanka presented its third full budget since the end of the war, Anushka Wijesinha (Research Economist IPS) looks at the formidable challenge for Sri Lankas development finding the money to finance it. Taxation, he argues, must be a major policy priority in strengthening the capacity of the Sri Lankan state.
market-oriented reforms following economic liberalization in 1977 and concessional loans from international aid donors soared for decades since then. But this is changing. Sri Lanka is moving away from low-income country status to the middle-income bracket. This means that it has less access to cheap/concessionary funds from international aid donors. Based on an ongoing survey of local and international development agencies that rely on foreign funding, it is becoming clear that Sri Lankas access to concessionary funding from abroad is rapidly shrinking. This comes at a time when there is a heightened pressure on public finances with the continued massive, and no doubt vital, post-war reconstruction

of the Economy 2012 report by IPS, this comes with its own set of concerns. Therefore, a stronger domestic revenue mobilization effort must be underway to strengthen the capacity of the state to address the critical development challenges, whether it is in health, education or infrastructure. Lewis (1984) argued that an increasing share of tax revenue in nationalincome or in GDP is an instrumental objective of economic development policy (p.6). High-income countries have had rising shares of tax revenue and government expenditures to income as they have become more advanced. As developing countries need to spend more on public infrastructure, education, health services, etc., they need to increase their tax ratio in order to grow and improve human development outcomes of its people (Bird et al., 2008). Almost half a century ago, Kaldor (1963) argued that for a country to become developed it needed to collect taxes at 2530% of GDP. Though Sri Lanka is classified as a lower middle-income economy by the World Bank, clearly Sri Lankas tax ratio does not correspond to one. Tax revenue as a share of GDP (the tax ratio) dropped to around 15% during 2003-2008, compared to about 19% before 1995. The benchmark tax-GDP ratio for a low-income country is 18%, and is 25% for a middle-income country (Gallagher, 2005)3. Sri Lankas was just 12.4% in 2011 (Figure 1). Sri Lankas performance compares poorly with countries like Vietnam, Thailand, Malaysia, Singapore, Ghana, and South Africa, but better than other South Asian neighbours, including India, Pakistan and Bangladesh and marginally better than Indonesia and Philippines. Sri Lanka performs particularly poor on collection of direct taxes i.e., taxes on income and profits collecting just around one fourth of total taxes from direct sources. The rest is from indirect taxes (mainly consumption-based taxes like VAT), which hurt the poor disproportionately as they are inherently regressive. Many other countries tax collection
Jul - Dec 2012 TE DIGEST 3

W
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hile Sri Lanka has made strong progress on many social indicators, significant development gaps remain. This is one of the core messages of the Sri Lanka Human Development Report 2012 launched at IPS in late 2012. Sri Lankas health and education sectors demonstrate
Jul - Dec 2012

notable gaps and heightened investment by the state would be required to bridge them, the report argues. In the past, Sri Lanka found it easier to finance these needs with generous donor aid flowing into the country. Sri Lanka was considered a donor darling as one of the first countries in South Asia to embark on

Guest Article
20

Total Tax Revenue as % of GDP

18

Figure 1: Sri Lankas Declining Tax Revenue to GDP Ratio (1977-2010)

16

14

J. Patrick Fischer | en.wikipedia.org/wiki/File:2012_Pudong.jpg

and the

Asian Century
by Razeen Sally

Economic Freedom

12

10
1985 1990 1995 2000 2005 2010

Source: Central Bank of Sri Lanka Annual Report (various issues); Department of Inland Revenue 2010.

Tax Policy Reforms Meanwhile, the fiscal system in the country constantly undergoes ad hoc tax changes, which have excessively complicated the tax system. It is uncertain whether these complications are related to the weak revenue-raising performance of the country. According to Waidyasekera (2004, IPS) unplanned and ad hoc fiscal measures including tax exemptions, tax amnesties and tax concessions; the increase in the exemption threshold for income tax and the reduction of import duty rates; lack of elasticity and buoyancy of the fiscal system; complexity in tax legislation and lack of fiscal consistency; and weaknesses in tax revenue administration, has caused the level of tax collection to be lower than optimal in Sri Lanka. A report by the Presidential Commission on Taxation 2009 identified all these issues and provided comprehensive recommendations to address them in a phased manner especially with the objective of expanding the tax base5. However, full implementation of the recommendations, particularly those on reforming of tax administration to make it more effective and efficient in collecting more tax, have not taken place - possibly due to competing stakeholder interests and political sensitivities. Yet, some reforms aimed at expanding the direct tax base have begun. For instance, in an unprecedented reform measure, the 2011 Budget extended PAYE income tax to public sector employees, stripping away the income tax exemption that they enjoyed since the
4 TE DIGEST Jul - Dec 2012

COMMENTS:

is more from direct taxes, for example Malaysia (over 60%), India (over 50%), Pakistan (around 40%), Thailand (50%), Uganda (just under 30%), and Kenya (just above 42%)4.

Mind the Gap With steadily declining international aid, resources to finance Sri Lankas development needs would increasingly have to come from within. There is of course always the option of raising riskier and costlier funds from international capital markets or friendly nations, but this is neither ideal nor stable. The capacity of the state to deliver services to the broader population and address human development gaps would depend on greater and better availability of financial resources to the state. In this context, improving the states tax revenue becomes a critical public policy issue. Comment: bit.ly/YFNkxq

Endnotes 1 Sri Lanka to get funding from higher cost window: World Bank, Lanka Business Online http://www.lankabusinessonline.com/fullstory. php?nid=1230609135 [accessed on 20th September 2012] 2 When figures from other education allocations related to different line Ministries are added, the total expenditure on education is likely to be higher than this 3 Gallagher 2005. 4 World Development Indicators database 5 Government of Sri Lanka. 2009. 6 Arunatilake, N., P. Jayawardena and A. Wijesinha (2012), Impacts of 2011 Tax Reforms on Tax Revenues and Redistribution in Sri Lanka, PEP Policy Brief No. 101 October 2012

tart with historical lessons. First, for most of the past millennium, Asia had predatory states that suppressed individual freedom and enterprise; and they were inward-looking. Recent avatars were China under Mao, Indias licence raj, and Indonesia under Soekarno. These gross errors should obviously not be repeated. Second, Asia should emulate the factors behind the Wests ascent during the past millennium: institutions to support individualism, competition and enterprise in market society; and openness to international trade, especially in the nineteenth century.

Third, Asia can reconnect to a golden age of commerce Indian Ocean and southeast-Asian trade before Western colonialism. Trade flourished among port-polities like Cambay, Calicut, Malacca and Macassar the precursors of modern-day Hong Kong and Singapore. Their rulers encouraged enterprise and overseas trade with light-touch regulation and very little protectionism. They also fostered religious tolerance and cosmopolitan societies. This plus the freedom of the seas enabled trading diasporas to knit Asia together through commerce. Fourth, the key lesson of the East Asian miracle of recent decades is to

Jul - Dec 2012

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Posted in July 2012

late 1970s. Additionally, corporate and personal income tax rates were reduced with a view to induce private economic activity particularly firms - and thus generate more total tax revenues and encourage greater compliance. But the revenue effect of these reforms is still uncertain. For instance, a recent simulation study by the IPS has showed that although adding the previously exempt public servants to the tax base certainly corrects the horizontal inequity between public and private sectors employees, the structural changes that came with the new tax scheme may result in a decline in tax revenues. According to the study results, the amount of tax revenues is reduced, from LKR 12.2 billion in 2007 to LKR 6.3 billion in 2011. Two main reasons are cited for the decline under the new 2011 tax system: i) the new tax brackets induced an increase of the tax free threshold from LKR.300,000 in 2007 to LKR.600,000 in 2011, and ii) the tax rates were also reduced to 4%-24% from 5%35% in 20076.

Mick Moore Anushka Wijesinghe is perhaps too kind about Sri Lankas tax performance over the past thirty years. It has been a miserable failure. The normal expectation, when average incomes rise, is that the proportion of national income taken in tax will also rise to meet growing demands for higher quality health and education services and public infrastructure. But, as Anushka shows, in Lanka, as incomes have risen, the tax take has declined. The immediate causes include the points he lists about endlessly changing tax policy and over-generous tax exemptions. One might add to this the failure seriously to modernise the tax collection system. But behind it all lies politics. It was the trades unions and the left political parties who used to make sure that the government raised enough revenue to take care of the poor. These forces no longer have much of a voice. It seems that neither the JVP nor any of the more mainstream political parties are at all concerned about these issues. The rich in Lanka are doing very nicely. They pay little or no tax on their incomes or assets. But what about the poor? They increasingly have to pay for their own health and education. Does no one care?

So many facets of the Asian century are discussed heatedly. But one is glossed over economic freedom. Market liberalisation is a crucial enabler of Asias current awakening. Its negative acts removing restrictions that repress economic activity have unleashed the animal spirits of ordinary people, and they are transforming Asia and the world in the process. But there is much unfinished business, for economic freedom remains substantially repressed across Asia. Expanding it will be vital to the progress of the Asian Century. This should be theleitmotiffor public policy and governance.

get the basics right: prudent monetary and fiscal policies, competitive exchange rates, low domestic distortions (such as price controls), openness to international trade, and investments in education and infrastructure. The alleged success of industrial policies selective interventions to promote targeted sectors is highly debatable. Indeed there is little hard evidence only assertion that they worked. Now turn to key planks of contemporary policy. First, financial-market policies. In most of Asia financial systems remain backward. Command-economy controls restrict opportunities for all but the politically well-connected and do a bad job in turning savings into productive investments. They restrict the transition from catch-up growth to more advanced, sustainable growth based on productivity gains. Enabling the transition to a more prosperous, sophisticated economy demands more financial freedom. That requires liberalisation removal of interest-rate controls, opening to new entrants, including foreigners, broadening capital markets, and, ultimately, capital-account

Insights

liberalisation though this has to be balanced with prudential controls to reduce vulnerability to extreme external shocks. Furthermore, financial repression is at the core of unbalanced growth in several Asian economies notably in China. It promotes over-saving Dr. Razeen Sally is Visiting and over-investment, Associate Professor at while repressing prithe Lee Kuan Yew School vate consumption, real of Public Policy and the Institute of South Asian wages and employStudies, both at the Nationment growth. Chial University of Singapore. nas financial system He is also Director of the channels and wastes European Centre for Inter massive amounts of national Political Economy capital through statein Brussels. owned banks to statehttp://www.spp.nus.edu.sg/ owned enterprises Faculty_Razeen_Sally.aspx while more efficient, labour-intensive private-sector firms are starved of funds. Carefully managed financial liberalisation would liberate domestic private-sector growth, especially in services. Second, trade and foreign-investment policies. In Asia, trade and investment liberalisation has created dynamic, globallyintegrated, world-class sectors, especially in manufacturing in East Asia. But there are still large pockets of protectionism, with huge variation across Asia. Tariff barriers are still a problem, but a plethora of non-tariff barriers obstructs trade and foreign investment much more. Most of these are embedded in complex domestic regulation. Domestic red tape on property rights, contracts, licensing arrangements, paying taxes, opening and closing businesses, labour laws and customs procedures continues to stifle the business climate much more than in the West. This is reflected in the World Banks Doing Business Index.OECD countries occupy 8 of the top 10 places (Singapore and Hong Kong are in first and second place). Malaysia, Thailand and Japan are in the top 20. But China is 91st, India 132ndand Indonesia 129th. Let us not forget that these regulations restrict economic freedom at the same time. The Fraser InstitutesEconomic Freedom of the World Indexhas only two Asian societies Hong Kong and Singapore in the top ranks; the others are way behind. Generally, Asian economic institutions public administration, enforcement of property rights, domestic regulatory au6 TE DIGEST Jul - Dec 2012

thorities are relatively weak and keep business and trade costs high, repressing entrepreneurship, innovation and consumption. They also result in badly integrated regional markets, beset by high intra-regional barriers to trade, investment and the movement of workers a far cry from the EU and NAFTA. Third, energy and environmental policies. Energy consumption in developing Asia is expected to double over the next two decades. That translates into much more demand for fossil fuels oil, natural gas and coal. China and India will import much more of all three, especially oil and natural gas, for which they will become even more reliant on the Middle East. But energy markets are throttled by government intervention and state-owned enterprises. Price controls, subsidies, export restrictions and inward-investment restrictions are the norm. Energy is hardly covered by WTO rules. China and India are attempting to secure energy supplies through command-economy rather than market instruments sending out highly subsidised national oil companies, striking long-term contracts with foreign governments, and pledging loans for oil. These measures make energy markets pricier and more volatile, and they exacerbate geopolitical tensions. More energy freedom is required to make energy supplies more stable, secure and cost-effective and to preserve peaceful international relations. That means liberalisation removing price controls and subsidies, encouraging private-sector and foreign investment, unbundling generation, transmission and distribution in the power sector, and freeing international trade. Increasing Asian consumption of fossil fuels to power industrialising growth translates into rising carbon emissions. However, according to the climatechange consensus, Asia particularly China and India will need to commit to binding targets to cap and then reduce carbon emissions sooner or later. Given the targets set, for example by the Stern and Garnaut Reports, that will inevitably lower growth potential. Here scepticism is in order. Climate science is not settled, contrary to the conventional wisdom. It, and much of the economics that flows from it, do not take adequate account of long-range uncertainty. And many of the proposals contained in heavy-hitting economic studies on targets, subsidies and massive aid transfers owe more to soft central planning than anything else. They constitute a huge threat to economic freedom. Adaptation to global warming

through market-based energy efficiency measures is advisable, but so is scepticism regarding mainstream advocacy of carbon mitigation. Now for some concluding observations. First, Asias poorer economies those in the low-income and least-developed brackets should concentrate on first-generation reforms for catch-up growth. This involves a combination of macroeconomic stabilisation and market liberalisation. That will provide the right environment for mobilising savings and investment, labour and capital, for growth. Asias middle and high-income economies should focus on second-generation reforms more complex structural reforms in the thickets of domestic regulation to boost competition, innovation and productivity gains. Both first and second-generation reforms entail the expansion of economic freedom. The former do not require deep reforms in underlying economic institutions; catch-up growth depends more on getting the policy basics right, which spurs a measure of institutional reform. But structural reforms demand deeper institutional reforms in order to deliver productivity-led growth. Otherwise catch-up growth tapers off and countries get stuck in a middle-income trap. Finally, economic reforms to expand economic freedom beg the question of political reforms to expand civic and political freedoms. The track record in Asia and elsewhere shows that catch-up growth is compatible with a variety of political systems, ranging from authoritarianism to democracy. Liberal institutions and open societies, with their plural ideas and their checks and balances, are not a prerequisite for catch-up growth. But unreformed autocracies, with unchecked vested interests at their core, are badly fitted to undertake structural and institutional reforms. Expanding economic freedom, embodied in the rising expectations of a burgeoning middle class, comes into conflict with straightjacketed, neanderthalic politics. Now the link between political and economic reforms becomes stronger. Will Asian institutions adapt? Or will political sclerosis keep countries stuck in a middle-income trap or worse? This is a mighty Asian challenge not least for China.
Comment: bit.ly/YJGJS6 Disclaimer: Economic Freedom in the Asian Century is a Guest Article. The views expressed in this article are strictly the authors own and do not necessarily reflect those of the editor of the Talking Economics blog or the Institute of Policy Studies. Any queries can be directed to talkingeconomics@ips.lk

Fiscal Imperatives for Growth and Stability

IPS Deputy Director Dushni Weerakoon takes a closer look at the pressures likely to emerge for private sector growth from emerging policy changes.
Fiscal consolidation efforts as set out in the Budget 2013 were not entirely unexpected.1 With revenue collection falling short of the target, adjustments to ensure that the deficit for 2012 remains close to the forecast 6.2% of GDP is to be brought about by a sharp cut back in public investment. Indeed, fiscal consolidation efforts appear to be on track with the deficit expected to decline further to 5.8% of GDP in 2013 (Table 1). The public investment-led development drive is set to continue and underpin the economic recovery efforts, with public investment as a percentage of GDP set at 6.1% in 2013. In a departure from recent years when foreign financing comprised a large chunk of the deficit financing requirement, the Budget 2013 has opted to rely heavily on domestic borrowing to bridge the deficit. Of the relatively high domestic financing component of 4.8% of GDP, 3.3% is to be raised from non-bank borrowing. With the government tapping domestic sources for the bulk of its deficit financing requirement, a pertinent question is whether Sri Lankas private sector, starved of funding in 2012 through the imposition of a credit ceiling on commercial bank lending, will be crowded-out further in 2013 from undertaking investment. Indeed, a related issue is the extent to which Sri Lanka is making room for private investment to step-in, and relieve the fiscal burden of driving the countrys investment growth in the current post-conflict phase of development. At first glance, it appears that conditions to ease the current monetary policy stance and encourage private investment growth in 2013 are emerging. Policy interventions introduced in February/March 2012 to curb credit growth is having the intended results. In August 2012, credit growth to the
1

Table 1: Fiscal developments (as% of GDP)

2012f Revenue Expenditure Current Public investment Deficit Foreign financing Domestic financing Non-bank 14.7 21.2 14.7 6.6 -6.2 2.6 3.6 2.8 2012e 14.0 20.4 14.7 5.8 -6.2 2.7 3.4 1.1 2013f 14.5 20.5 14.6 6.1 -5.8 1.0 4.8 3.3

Source: MOFP, Department of Fiscal Policy.

private sector eased below 30% for the first time since March 2011. However, the conditions for an immediate easing of the monetary policy stance are not present in view of a greater recourse to domestic borrowing by the government in the last quarter of 2012 to bridge end-year budgetary financing gaps. As a result, even as credit growth to the private sector has been cut off, upward pressure on interest rates is continuing (Figure 1). However, with inflationary pressures moderating in the economy, with end year annual inflation targeted to be 8.5% in 2012, and fewer price pressures expected in 2013 with a muted economic recovery, better agricultural output, and slowdown in international oil prices, inflationary pressures in 2013 too can be expected to remain fairly moderate. Thus, the conditions to ease monetary policy and reset interest rates at a lower rate in the first quarter of 2013 in support of higher GDP growth are emerging. Sri Lankas private sector may thus benefit from an easing of monetary policy in the first quarter of 2013. However, it appears unlikely that a more favourable environment to undertake investments can persist over the course of the year, if as suggested by fiscal policy projections for 2013, the government resorts to a high volume of domestic borrowing for deficit financing purposes. Sri Lankas private sector is likely to find itself competing with the government for investment finance that will drive up interest rates in the economy, and be crowded out once again from a more vigorous participation in the countrys post-conflict growth process. Comment: bit.ly/SkkXTw

Figure 1: Monetary Conditions

12 10 8 6 4 2 0
J MM JS NJ

Inflation (CCPI)
2011 2012

Annual average Point-to-point

MM JS

Credit Growth & Interest Rates

80 % change 60 40 20 0
Jan MarM ayJ ul Sep Nov

15 Interest rates Govt + public corps Private sector 10 5 0

Source: CBSL, Monthly Economic Indicators, various issues.

See IPS, Prospects in Sri Lanka: State of the Economy 2012.

W.A Wijewardena Dushni has presented an excellent overview of the current budgetary position in SL. However, in modern public finance, one does not go just by numbers and look more into the impact of public expenditure programmes. With easy money raised by the government through borrowing from local and foreign sources and money printing by CB, it has become possible for the government to undertake infrastructure development projects and the engineering feasibility has in fact created such outputs in physical form. But what is missing, according to modern public finance experts, is outcome and impact of these projects on the economy. That requires the government to follow market principles, linking of infrastructure with private initiatives and when they are run by the state, to have a good business plans. All these three are missing in the current budgetary policy. As a result, physical infrastructure is there, but it does not add to the wealth generation of the country on a sustainable basis. Just consider Rs 600 million Ranminitenna Rupavahini Village or again Rs 680 million Diyagama International Sports Stadium. The analysis of budgtary policy will be complete only after conducting a proper impact assessment study to gauge their true contribution to the economy. Jul - Dec 2012 TE DIGEST 7

COMMENTS:

Environment

Public Policy

Greening Jobs:

Getting Things Started

By Kanchana Wickramasinghe
UNEP (2008) defines the concept of green jobs as encompassing two basic elements. The first involves, averting dangerous and potentially unmanageable climate change and protecting the natural environment which supports life on earth. The second element focuses on providing decent work and thus the prospect of well-being and dignity for all in the face of rapid population growth worldwide and the current exclusion of over a billion people from economic and social development. It is accepted fact that the promotion of green jobs encourages sustainable development and it is by definition, a tool for coping with climate change. In addition, green jobs can provide a business advantage for the private sector which will contribute towards the sustainable development of a country. Also, and most importantly, green jobs explicitly provide decent work. The ILO defines decent work as being productive work for women and men in conditions of freedom, equity, security, and human dignity. Accordingly, decent would should include opportunities for work that is productive and delivers a fair income; provides security in the workplace and social protection for workers and their families; offers better prospects for personal development and encourages social integration; gives people the freedom to express their concerns, to organize and to participate in decisions that affect their lives; and guarantees equal opportunities and equal treatment for all. Therefore, it could be argued that green jobs are not merely sustainable, but also ethical in their inherent promotion of equity and personal growth. The widespread acceptance of the concept would then increase the number of jobs through which environmental sustainability and decent work conditions are incorporated into economic activities. Therefore, green jobs can be considered as a positive outcome of sustainable development with particular reference to the energy sector, where there is an increasing recognition in the potential of creating green jobs and the emphasis on finding sustainable solutions for current energy-related issues. Identifying the Green Estimating the number of green jobs in a country or a sector is a challenging task, given the complexity of different processes/components, range of stakeholders and skill classes involved. In the first instance, it is difficult to measure which of the activities are environmentally sustainable using macro level data because this essentially requires a micro level assessment. There isnt a comprehensive set of criteria developed for identifying environmentally sustainable activities. Therefore, the first step would be to identify these criteria. Once the environmentally sustainability aspects have been identified, then comes the issue of decency of work, which is, again, challenging to assess. The criteria for identifying green jobs can vary depending on the nature of the economic sectors, and further complicating the matter, differences can exist between different countries for the same sector as well. Green Jobs in Sri Lanka Again, there is no readily available information to provide an estimate of the country as a whole. However, a number of economic sectors which have significant involvements in the natural environment and deal with natural resources, have the potential to generate green jobs, which means that green jobs can be found in the industrial, fisheries, forestry, agriculture, energy, water, tourism, and waste management sectors. As mentioned previously, environmental sustainability aspects are not uniform across sectors. The dependence on the natural environment and the contribution of different economic sectors to the environment vary to different degrees and are incredibly complex. In addition, even within the sectors, identifying the activities or sub-sectors which adopt sustainability aspects remains a challenge. There can also be geographical variations in this regard. Incorporation of decent work aspects, further, adds to the complexity of green job assessments. In many cases, there is no compiled information about aspects which constitute decent work. This again, highlights the urgent need for the development of country-specific criteria for the different economic sectors. Given the increasing importance of sustainable development, Sri Lanka has taken steps to promote the concept of a Green Economy in various ways. A National Action Plan has been developed by the Ministry of Environment for the furtherance of this concept. This action plan, called the National Action Plan for the Harith Lanka Programme, has deemed Number of green jobs increased as a measurement of the Strategy/Action 9.3 which is to, Promote private sector and other professional in-

Public Health:

Health in All Policies

Health permeates all aspects of social life. This factor is now being recognized in public policies, with health increasingly being included as a key concern in all policies. Marking National Health Week, Samanthi Bandara explores the concept of Health in All Policies (HiAP) in the Sri Lankan context and stresses the need to do more.

Healthy Public Policies Begin with

stitutions to incorporate sustainable development practices in the economic and social development systems/procedures. Although there has been no direct initiative to promote green jobs, increased emphasis on making the ongoing development activities sustainable as well as the provision of decent work will have direct implications on the availability of green jobs in Sri Lanka. As green jobs brings simultaneous implications on two distinct development aspects, environmental sustainability and decent work, coordinated action is required between the agencies which are mandated to undertake them. Comment: bit.ly/YJGEOi

ealth of the population in a country is not solely dependent on health sector activities alone. It is also determined by a variety of factors outside of healthcare services. These are referred to as the Social Determinants of Health (SDH). It is accepted that social factors such as, education, environment, working conditions, eating habits, leisure activities, influence peoples health. For instance, obesity1, which in Sri Lanka is currently at 25% for women, and 17% for men2, is a major risk factor for non-communicable diseases such as cardiovascular disease, diabetes, and cancers. It is linked to unhealthy diets, physical inactivity, harmful use of alcohol, and tobacco consumption3. Therefore, many countries have made concerted efforts to integrate health considerations into other public policies which have an impact on health4. What is HiAP? The rising importance of addressing social determinants began during the adoption of the Alma-Ata Declaration in 1978, in which Health for All was a key goal. Subsequently, the importance of Intersectoral Action for Health (IAH), which is the development of symbiosis between health and other sectors, was

Posted in August 2012

The Sri Lankan context Sri Lanka began intersectoral actions on health during the pre-independence era. Yet, the objectives of these initiatives were not strictly compatible with the concept of HiAP. However, it is important to look back upon about these early inroads because they have laid the foundation for the implementation of HiAP. Some of these early interventions included

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recognized as a vital mechanism when addressing the SDH. Most recently, the concept of Health in All Policies (HiAP), was initially introduced by Finland in 20605. Subsequently, HiAP was recommended as a complimentary policy related strategy to integrate health into other sectors in the Adelaide Thinker in Residence in 20076. The two concepts, which emerged in different eras, have significant differences. The concept behind IAH was that the health sector be directly involved at the policy implementation level in other sectors, and attempt to get their support in order to mitigate health impacts. In contrast, HiAP requires that the health sector partnership with other sectors begin at the policy formulation level, and continue towards implementation as well as evaluation7

the setting up of the National Health Development Council (NHDC) in 1979, the NHDC had the major responsibility of coordinating and reviewing the policy implementation in the health and health related sectors, ultimately reporting their strengths and weaknesses to the government8,9 . In 1980, the country made the commitment to provide Health for All (HFA) by the year 2000, when the Prime Minster and the Minister of Health, together with the World Health Organization (WHO), signed the Charter for Health Development. Accordingly, the National Health Development Network was established to address IAH. Afterward, the National Health Council (NHC)10, chaired by the Prime Minister, was established towards the end of 1980, as the governance tool at the Cabinet level to implement and coordinate IAH. Consequently, the NHC came to be seen as an apex body, ensuring political commitment on IAH. However, when looking at the key functions of the NHC11 carefully, it can be observed that the NHC functioned in some respects as a HiAP concept, in that it dealt with 2 out of three HiAP requirements, namely, policy formulation and implementation. As per the available records, the NHC appeared to not be operational as of 2003. Thereon,

Higher Education

a variety of fragmented committees and task forces were established in the health sector to look after the concerns of SDH with support from other sectors12, for example, the National Nutrition Committee; and the Presidential Task Force on Dengue. These committees remain fragmented, and therefore do not represent a wide enough group of stakeholders to count as a national mechanism, which can make an adequate impact on national health outcomes. The International Example Several countries argue that Health Impact Assessment (HIA)13 is the most appropriate governance tool in order to implement the HiAP, which can be used as an intersectoral strategy14. This helps decision makers to gain better knowledge about public health. Further, as the study on the effectiveness of HIA, which looked at 16 countries in the European Union in 2007, revealed that the practice of HIA exerts a substantial influence on the decision making process, regarding the determinants of health15. According to the empirical evidence gathered from various countries which have implemented HIA, substantial support from the highest levels of government, in terms of administration and legislations, are major factors that influence the success of HIA16. In addition, the stakeholders in Sri Lanka argue that political commitment is an essential condition when setting up HiAP17. A good regional example is the Government of Thailand. It enacted the National Health Act in 2007, with the aim of mainstreaming health in public policies18. Following that, the National Health Commission and Health Impact Assessment was established in order to implement the aims and purposes of the Act. According to the Declaration of the National Health Commission in Thailand, any project or activity which has an impact on health has to obtain the HIA, prior to the commencement of the project or activity. Further, the Commission has conducted the National Health Assembly each year since 2008, to share the knowledge and experiences of other countries on their HiAP practices. The Way Forward It is evident that Sri Lanka currently does not have an integrated governance tool which deals with health in other public policies through policy formulation, implementation and evaluation at a national level. There are

fragmented committees and task forces which are addressed various health issues at different levels. However, it is observed that many government institutions, the private sector, NGOs, and civil societies, are not aware of the concept of HiAP and its importance for a healthy society19. Hence, mainly two proposals were made at the stakeholder meeting to cement the commitment of these sectors, and to regularize the HIA in the country. Forming a sustained and effective governance tool should be the foremost initiative of this agenda. To accomplish that, a series of effective advocacy programmes needs to be conducted for wider groups of stakeholders from each sector, while the commitment of the political machinery needs to remain strong.. Finally, a legal window for regulating the HIA needs to be set up, in similar to the Environmental Impact Assessment, as it is the most effective governance tool for Healthy Public Policies in the country.

Endnotes 1. A person with BMI between 25.0 and 29.9 is considered overweight and 30.0 is considered obese. 2. http://whosrilanka.healthrepository. org/bitstream/123456789/425/1/Sri%20 Lanka%20ahead%20in%20controlling%20 communicable%20diseases%20-%20WR.pdf 3. Non-Communicable Disease in the South East Asia Region: Situation and Response, 2011, Regional office for South East Asia, World health Organization. 4. Stahl Timo at el., Health in All Policies: Prospects and Potentials, Ministry of Social Affairs and Health 2006 5. Puska P.,(2007), Health in all policies, European Journal of Public Health, Vol. 17, No. 4, 328 6. Kickbusch, I., Healthy Societies: addressing 21st century health challenges 2008 7. David V. McQueen et al, Intersectoral Governance for Health in All Policies, Structures, actions and experiences, World Health Organization 2012, on behalf of the European Observatory on Health Systems and Policies 8. Personal communication with Dr. Sarath Samarage, National Consultant-WHO Country Office, Sri Lanka, and Former Deputy Director General/Planning and Country Coordinator, Secretariat for Social Determinant of Health, Sri Lanka. 9. The chair of the committee was the Secretary of Health and the Secretaries of other relevant ministries were the members. 10. The Ministers from the following ministries represented at the NHC: Ministers of Health, Higher Education, Finance and Planning, Labour, Rural Development, Housing and Construction, Home Affairs, Local Government, Agricultural Development and Research. 11. Key functions of the NHC were: (1). to guide Ministries, departments and other organizations engaged in health activities; (2). to coordinate activities of Ministries and other organizations; (3). to create greater awareness among people of the importance of health; and (4).to promote community participation and involvement 12. Round Table Discussion on Public Policies and its Impact on Health: Health in All Policies (HiAP), 21st February, 2012 at the Institute of Policy Studies 13. According to the WHO European Centre for Health Policy, 1999, pg. 4, HIA is a combination of procedures, methods and tools by which a policy, program or project may be judged as to its potential effects on the health of a population, and the distribution of those effects within the population 14. Louise St-Pierre et al, Governance Tools and Framework for Health in All Policies, European Observatory on Health Systems and Policies. 15. Wismar et al.,The Effectiveness of Health Impact Assessment, 2007, European Observatory on Health Systems and Policies. 16. ibid 17. ibid 18. Thailands Rules and Procedures for the Health Impact Assessment of Public Policies, 2010, Health Impact Assessment Coordination Unit, National Health Commission Office, Thailand 19. Ibid

Lankan University Graduates:

No Worms?
By Harshanee Jayasekera
going through delaying students from entering into the labour market.Ensuring smooth movement from education to work will not make a significant impact on the youth entering the labour market if the transition cannot be done fast. A quick transition from school to work ensures that new labour market entrants remain young when they start working. This is essential because educated young people are innovative, barely risk averse, positive in their thinking, and open to change. A majority of students in the OECD graduated from university by 25 years of age, although mature students (30+) were prominent in Finland, Iceland, Norway, Sweden and Israel. Mature graduation in these countries is a result of a very flexible education system where going away and coming back to school or university is relatively easy[2]. In the UK, students graduated younger (at age 24) than the average European graduate of age 26+. This was mainly the result of younger students entering into universities and also relatively shorter study courses[3]. In the USA, the median age of graduation has risen mainly because undergraduates tend to stay longer in college to avoid being unemployed. They continue to be on parental support and live as students[4]. Although statistics for India and China and other Asian countries are not available, a report published by the Indian University Grants Commission indicated that Indian students in university education are usually between the ages of 1824[5]. Similarly, Chinese undergraduates too graduated at an average of 24 years[6]. In comparison, Sri Lanka doesnt seem to be placed particularly lower in terms of its median age of graduation, which is 24+. However, what is important to note is that Sri Lankan students could graduate at a much younger age, ideally 22+ or 23 years at most, if not for long time lags taken by the authorities to put out results and make selections for universities. In Sri Lanka, a child born in 1988 who pursued education up to university would be idling for approximately two years until administrative and examination procedures were carried out. Similarly, in Finland and Ireland students usually stay more than one year to attend university after qualifying examinations. However, staying between qualifying certificates and university admission in these countries is often a voluntary decision by the students[7].

Late Birds,

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Saroj Jayasinghe Faculty of Medicine, University of Colombo Thanks Samanthi for the excellent introduction. It is high time Sri Lanka initiates activities to introduce, strengthen and improve the systems available for Health Impact Assessment. We could piggy-back on the Environment Impact Assessment legislation and regulations that the country is already familiar with. A recent example of HIA is to study the health impact of the highways that are coming up all over the country. These could include more high-speed accidents, more air pollution, less travel time for emergency transport of patients. These should be predicted and the health system should respond appropriately (e.g. strengthen Trauma Services in hospitals close to the Highways, to tackle high-speed vehicular impacts). I think the IPS is ideally placed to take this area up. Sisira Siribaddana Faculty of Medicine and Allied Sciences, Rajarata University of Sri Lanka The health impact of green revolution is acutely felt in NCP with Sri Lankan Agricultural Nephropathy. Traditional knowledge harvesting (agriculture and medicine) is probably the answer. Western medicine failing in front of my eyes. Samanthi Many thanks Sir.Yes, we should take this area forward to introduce HIA into the system. Particularly, HIA needs to be legislated urgently.

The university system is in chaos again. Following the disruption of a month of academic activity due to an island-wide strike by university non-academic staff in June this year, the academic staff also took trade union action in early-July. The two strike actions have cumulatively taken two months off the undergraduate calendar and a suitable resolution has not been made to date. While this article excludes itself from commenting on the politics of such action, it rather serves to highlight how it impacts youth in Sri Lanka and the economy as a whole.The movement of youth from being just students to workers has great economic and social associations, which in turn contributes towards productive human capital and healthy citizenship. Therefore, it is important that young people move from one chapter of life to another in a healthy socioeconomic and political setting. A successful transition to work for todays many young people can accelerate poverty reduction through better allocation of their labor, and boost economic growth. Difficulties in entering the labor market can persist and be very costly to mitigate- World Development Report (2007) In 2007, the World Bank dedicated the World Development Report to the subject of enabling smooth youth transition to adulthood. It pointed out how economically and socially important it is to enable a smooth transition from school to work and stated that youth often face problems such as starting too early, failing to enter the labour market, and difficulties in moving across jobs. From Education to Work The problem of failing to enter into the labour market has many facets. The most common one in Sri Lanka being the lack of skills or the mismatch of already acquired skills with employer expectations[1]. However, there are other reasons such as administrative inefficiencies and disruption in the university system similar to what the system is currently

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Average University Students in Sri Lanka Graduate 3 Years After Their Peers in the West
UK USA Sri Lanka
A year in School A year in University A year of Idling

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Health Sector

Oop(s);
This years final year graduates in Sri Lankan state universities will not be graduating until they are 25+, as a result of the ongoing trade union action by the university academics and the forthcoming third trade union action to be taken by the university non-academic staff. These trade union actions have prevented the final year students from completing their degree requirements, which otherwise would have been completed by September this year. In most European countries tertiary education is provided free or at subsidized rates. Students are encouraged to choose university education at leisure. The European education system is also relatively flexible and allows students to leave and re-enter education free of hassle. This relative flexibility has further encouraged European students to opt for several years of employment exposure before re-entering into education. As a result, 30% of Finnish students enrolled in university and 52% of Italian undergraduates had paid employment experience. This is not an option for university students in Sri Lanka as social norms suggest that students should complete education before entering into the labour market. Further, rigidities in the education system and tight competition to enter into state universities make it almost impossible for a student to choose when to start higher education. The times are changing. But for many students awaiting university admission, the private sector has nothing to offer because students are unlikely to stay in employment after being selected. Even if they wanted to, the academic programme is designed in a way that makes part-time employment unviable. Therefore, the period between the Advanced Level qualification and university admission is almost entirely spent idling. This highlights another disadvantage Sri Lankan graduates face when entering into the labour market after late graduation their lack of labour market experience. Part-time work and research opportunities within university are often available for students in other countries but are not so in Sri Lankan universities. Even formal internship opportunities and part-time employment while studying are not viable options for students if lecture times are greatly spread out. Evidence suggests administrative drawbacks as being the major cause for the late graduation of Sri Lankan students. Therefore, it is quite clear that cutting down on the time taken to enter students into universities would significantly improve the job market experience of young undergraduates as they have more time to shape themselves for the private sector. It would also facilitate entrepreneurship by encouraging young people to take calculated risks before they reach the typical age of marriage. Administrative Delays: Biggest Constraint Sri Lankans born in the late 1950s graduated at the age of 21 or 22. With no drastically different changes taking place in the education system, the increased time taken for todays undergraduates to graduate is a modern phenomenon. The graduates on the verge of graduating this year are forced to idle in the indefinite nowhere between studentship and employment. A quick graduate output for a country is a catalyst for development and has a lasting positive imprint on the individual. Overall, with low levels of tertiary education quality[8]and low enrolment rates, undergraduates in Sri Lanka are more disadvantaged than their peers in other developing countries. With all that has been said, it is clear that authorities should seriously look into reducing the time taken to graduate students from education to work. Given the development aspirations of the island, a young workforce can contribute towards economic growth. Administrative delays should not get in the way of this. The countrys innovative capacity and entrepreneurship potential must not lie idle in transition between education and employment. *The author acknowledges the valuable input and guidance provided by Dr. Nisha Arunatilake, Research Fellow and Head of the Human Resource Development Policy Unit IPS. Comment: bit.ly/YJGCGf

Struggling for equity in Sri Lankas Health Sector Amidst

Rising Out of Pocket Expenditure

By G.D. Dayaratne

One could argue that Sri Lankan students do not miss much because median age of graduation for both local and foreign students is almost the same. However, evidence suggests otherwise. Students in Europe and the OECD voluntarily choose to enter into education later than the typical age. Late Graduation: We Are Missing More The cost of education in most OECD countries has been the main driver of the recent rise in the median age of graduation there. At the same time, soaring job opportunities for graduates and young people seemed to have encouraged more students to stay in education. This dilemma is not faced by Sri Lankan undergraduates as tertiary education is provided free-of-charge. Therefore, the cost of education is an unlikely factor affecting later graduation of university students in Sri Lanka.
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Wasantha Kumara I expected to read some overall economic impacts of the situation in Sri Lanka but unfortunately there is nothing like that.Yes the facts provided in the article is rather OK but the comparisons made with developed countries and India and China is not relevant and incomparable to Sri Lankan case in my opinion. What Sri Lanka lacks is a behavioral and attitudinal change among the youth towards labour market. It is not mere the reason that the author is trying to pop-up

Endnotes 1 School-to-work transition of Youth in Sri Lanka (2004) 2 Highlights from Education at a Glance (2010)OECD 3 The Flexible Professional in the Knowledge Society new demands on higher education in Europe (Report 5) (2008) 4 The jobless young: left behind (2011) The Economist 5 HIGHER EDUCATION IN INDIA: Issues related to Expansion, Inclusiveness, Quality and Finance (2008) 6 Starting your career in China country guide for international students 7 Eurostudent IV database. eurostudent.eu (database) 8 The Global Talent Index. Heidrick & Struggles (2012)

The healthcare system in Sri Lanka is the metaphorical feather in the nations cap. The relationship between social factors that lead to health or chronic diseases has long been recognized in Sri Lankas public health care delivery system. This has led to the establishment of a network of 954 government health institutions, including central dispensaries in 276 areas designated by the Ministry of Health (MOH) with a health workforce of nearly 50,000, widely spread throughout the country providing free healthcare. The excellent progress in numerous healthcare indicators, such as maternal and infant mortality, and life expectancy, have quite rightly been acknowledged as being on account of the reach and potency of this system. The Sri Lankan healthcare system is a combination of public health the main driver enabling universal access which is financed by general revenue sources and the private sector which is financed through fees levied for service arrange-

ment. But the emerging trend is the rising Out Of Pocket (OOP) expenditure on health which refers to the cost that is borne by the private consumer for the purchase of healthcare goods and services that are not covered by private insurance providers (or the national healthcare system). It is, by definition, a non-reimbursable expense. As per the Sri Lanka National Health Accounts (2009), household OOP expenditure on health in Sri Lanka rose from just Rs. 5.2 billion in 1990 to 76.1 billion in 2009. The share of OOP expenditure in Total Health Expenditure was 46% while the share of OOP expenditure in Private Health Expenditure was 89%. The OOP expenditure on health in a household is mainly spent on the purchase of hospital care, professional services including physician services, prescription drugs and non- prescription drugs. This expenditure can have a direct impact on poverty because of its affect on the general consumption levels of poor households. For instance, it may reduce

access to health care for individuals in a household because of an increase in the price of drugs or treatment. Unraveling OOP expenditure Expenditure on medicine in the period 1990 2009 (Figure 1) indicates that nearly 50% of OOP expenditure was consumed by medical goods dispensed to Out-Patients each year. In 2009, it was found that Rs. 32 billion was spent on the purchase of medicines out of the Rs 84 billion of Current Expenditure (constituting to just over 38%) by Private Sources. The data clearly portrays the fact that private expenditure on medicine has an indelible impact on household incomes. This is particularly critical in the context of the present volatile exchange rates, as 96% of medicinal drugs are imported. PUBLIC SECTOR: Gaps in Healthcare Provision In Sri Lanka, public expenditure allocation for medicine for patients through
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As a result, students who are applying to foreign universities for their Masters Degree will have to stay back a year in Sri Lanka because deadlines for financial aid applications and admissions are almost passed. This also delays job market entrants who would be on, or above, the industry norms of entry-level age requirements. Although there are no hard statistics, more time taken to graduate means that students will be less desirable to the private sector. This leads to the waiting line for state employment longer. Further, being students for longer than necessary inadvertently puts their personal life on hold. Marriage will have to wait until students graduate and stabilize their finances before embarking on starting a family.

Sri Lankans spent Rs. 70 billion more out-of-pocket on healthcare in 2009 than 20 years ago Poor are hit hardest by medicine shortages in state hospitals and lack of regulatory framework for drugs

Giving Tourism a Green Shade

alarming instances, it has become common practice for a patient to get drugs directly from these pharmacists without a doctors prescription or with the use of out-dated prescriptions, which would cost less when taking in to account the cost of travelling and the consultation fee. This creates a very precarious situation for the health and well-being of the citizens of the country, who for reasons of unaffordability are forgoing proper medical care which could contribute to further, direr, complications in the future. Conclusion OOP expenditure on health hits particularly hard on the poor, whose ailments will either remain untreated or end up forcing them and their families into deeper poverty. To mitigate the economic and health impact on household, the most pressing need is to maintain an uninterrupted flow of life-saving essential drugs in government health facilities. Since the much anticipated Medicinal Drug Policy is still to come in to effect, the pharmaceutical retail market is primarily responsible for the increasing OOP expenditure on health. To mitigate the financial burden on health in these households, the only remedy available lies with the Ministry of Health. Here are some key priorities for the MoH in mitigating the impacts of increasing OOP health expenditure:

Studying Environmental Practices in Sri Lankas Hotels

By Kanchana Wickramasinghe
Racing Ahead Tourist arrival statistics indicate the strong revival of tourism in Sri Lanka following the end of the separatist war. While the South Asian region recorded an 11 % increase in tourist arrivals in 2011, Sri Lanka showed a remarkable growth of 48 %1. The arrivals have increased by 98 % in 2011, when compared to the situation before the war ended in 2008. The World Travel Market 2011 Industry Report identifies Sri Lanka as one of the six emerging countries in tourism along with Brazil, Russia, India, China and South Africa; due to its revival after the separatist war, high investments in infrastructure development, and the beauty of the destination. Given the vast potential emerging in the tourism industry, the Sri Lankan government has set ambitious targets to attract 2.5 million tourists by 2016. The target is nearly 2.9 times that of the arrivals in 2011. Several initiatives are in place to cater to the increasing demand for hotel accommodation by means of new investments and expansions of existing accommodation facilities. Accordingly, the number of hotel rooms is expected to increase to 50, 000 by 2016, from 14,653 in 2011. Growing Pains Tourism is an industry which consumes significant quantities of water and energy resources, and generates waste. In the case of Sri Lanka, the hospitality sector ranks as the most energy intensive and therefore, the most costly to power. The electricity demand of the hotel sector constitutes 4-5% of the national electricity demand and the cost of this energy consumption makes up about 18% of the total operational expenditure of a hotel2. With the increasing number of tourist arrivals, there is a likely increase in the amounts of energy and water used, and a consequent generation a larger quantity of waste. Considering both economic and environmental factors, it is important that the hotel sector undertakes investments in efficient environmental management practices and implement effective waste management approaches. Adoption of environmental management practices will promote sustainable utilization of water and energy resources, and minimize the probable negative impacts on the environment through waste management. To sweeten the whole deal, it has been found that there is a possibility of a 20% savings in energy and water consumption as well as a 20% reduction in waste generated by the hotel2. This translates to an overall reduction in operating costs for the hotel industry, and given current tourism trends, might lead to a better reputation resulting in an increase in consumer demand. It is widely believed that hotels tend to adopt good environmental management practices as a cost reduction strategy, and a means to get a market advantage. The evidence from different parts of the world reveal that the adoption of good environmental management practices by hotels is governed by an array of factors. The aforementioned two factors are irrelevant in certain contexts. The literature shows that the determining factors can be either, hotel-specific or external. Government incentives, government monitoring, managers characteristics (such as age, managers industry tenure and education), receipts of environmental awards, environmental news in print media, trade association membership, and hotel focus on green consumers, are among some of these factors. Identifying the problem There isnt a benchmarked environmental management process in Sri Lanka. It hasnt been well researched or documented, leading to a host of questions regarding the relationship between the location, star classification, chain affiliation, attitude and awareness of higher management, and their affect on environmental management practices. The lack of evidence puts the industry in a difficult position, as all or none of these factors could affect the management of energy, water, and waste in hotels. The fact remains, that until we gather such evidence, the greening efforts in this sector are akin to scrambling around in the dark.

government health institutions was around Rs.15 billion in 2009. Around 60% of drug allocations were being distributed amongst National Hospitals, Teaching Hospitals, Provincial Hospitals, Base Hospitals, Districts Hospitals and other Specialized Hospitals. The remaining 40% was distributed through peripheral units such as Rural Hospitals and Central Dispensaries. Rural hospitals and peripheral units cover nearly one third of the population, and it has been regularly reported that these institutions are frequently experiencing shortages of essential medicines. Therefore, although public sector hospitals are expected to provide drugs free-of-charge for patients, the reality is that most patients tend to purchase expensive drugs and sometimes even devices that are needed for surgeries (such as lenses needed for cataract operations, stents required in certain heart surgeries, valves and several other items) from private pharmacies. This leaves the patients with a choice of either having to forgo the medical interventions they need, or to bear higher OOP expenditure. This i suggests the fact that the main objective of having a public healthcare service, which is to protect a household from financial burden when they fall ill, has been severely hampered as a result of the shortages of essential drugs and equipment, especially in primary and secondary level facilities. Private Sector: Private Hospitals, Drug Prescriptions, and Illegal Pharmacies The private hospital industry remains highly concentrated in densely populated metropolitan localities and continues to portray oligopolistic market characteristics. In 1990, there were 44 private hospitals in operation, which increased to 112 in 2011 (excluding Estate hospitals

and Co-operative hospitals). The number of Out-Patients treated in these hospitals increased from 419,000 in 1990 to 6 million in 2011,[1]and the number of In-Patients treated, increased from 65,000 in 1990 to 401,000 in 2011. Most of the private facilities, mainly In-Patient facilities, are patronized largely by higher income households who have the financial capacity and private insurance facilities to mitigate the impact of high medical expenses, when compared with poorer households. In comparison, Out-Patient facilities are used by all income groups, but mostly by higher and middle income groups. Constraints in access to medicines in public facilities (mainly for Out-Patients treatment), has forced poor households also to seek treatment from these private facilities despite the adverse impact to their households other expenditure levels. Due to industry pressure certain doctors are in the habit of prescribing medicinal drugs marketed by selected manufacturers and importers when more affordable alternatives are available. In Sri Lanka, there were approximately 10,000 varieties of drugs imported (including generics) as at 2011 , compared with 2200 varieties imported in 2001. Taking in to consideration the volatile exchange rate regime present in the country, this makes the general cost of drugs in private pharmacies go up exponentially. This situation has been further exacerbated with the influx of over 3000 private pharmacies that are in operation illegally without proper regulation. Unregulated markets such as these are often supplied with stolen and diverted drugs from government hospitals. In some instances, patients do not purchase the prescribed dosages of drugs due to their economic constraints. In other, more

Marking World Tourism Day 2012, Kanchana Wickramasinghe discusses a pioneering new study that attempts to measure the impact on the environment of Sri Lankas booming tourist hotel sector

Research-based evidence on environmental management practices in the hotel sector will be pivotal for the sustainable development of the industry on two fronts. First, given the significant expansions in the accommodation sector, such evidence is vital to make the on-going and forthcoming developments environmentally and economically sustainable. Also, given the increased demand ecologically sustainable tourism, such studies can provide implications and data which could be used to leverage Sri Lankas position as a sustainable tourism destination. First Steps The IPS, with the financial and technical assistance from the South Asian Network for Development and Environmental Economics (SANDEE), is undertaking a research study to assess the energy, water, and waste management practices, in the hotel sector in Sri Lanka. The two-year research project will come up with vital information on environmental management in the hotel sector, factors governing the adoption of environmental management practices, and policy implications to promote environmental management in the hotel sector. In sum, the study will shed light on a benchmarked environmental management process for the tourist sector in the country. Comment: bit.ly/YJGvdT
This post is in our new category The Note Pad, where IPS researchers bring you short informal opinion pieces containing their personal thoughts/ideas/questions/contentions from ongoing research work and related engagements (seminars, presentations, conferences, etc). References 1UNWTO (2011), UNWTO Tourism Highlights 2011 Edition 2Miththapala, S. (2011), Good practice guidelines on environmental management for Sri Lankan hoteliers. Colombo: SWITCH Asia Greening Sri Lanka Hotels Project, C C Solutions.

financial allocation for medicines The regularization of the distribution of medicine to the hospital network in order to avoid intermittent shortages Enhancing the production of the allotted variety of medicines at the State Pharmaceutical Manufacturing Corporation Streamlining the distribution network of the State Pharmaceutical Corporation and the Implementation of the Medicinal Drug Policy Offering equitable access with a pricing mechanism that ensures affordability through the introduction of legislation requiring the prescription of generics and allowing cost-effective generic substitutions to be freely available.

Comment: bit.ly/YJGzds For more information on the latest Health Expenditures and related data, see Sri Lanka National Health Accounts: 2005-2009 published by the IPShttp://www.ips.lk/publications/latest_publications. html [1]IPS Census of Private ,Co-operative, and Estate Hospitals 2011

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Posted in September 2012

Increasing

Human Development

Gender Equality in Human Development

Table 1: Gender Inequality Index and related indicators

Very high human development High human development Medium human development Low human development World Sri Lanka

GII

Maternal mortality rate per 100,000 live births (2008) 16 51 135 532 176 39

Adolescent fertility rate (2011)

Seats in national parliament (% female) (2011) 21.5 13.5 17.3 18.2 17.7 5.3

with at least secondary education (% ages 25 and older) (2010) 82.0 61.0 41.2 18.7 50.8 56.0

Labour force participation rate (%) female (2009)

0.224 0.409 0.475 0.606 0.492 0.419

23.8 51.6 50.1 98.2 58.1 23.6

52.8 47.8 51.1 54.6 51.5 34.2

Source: UNDP (2011), Human Development Report 2011, Sustainability & Equity: A Better Future for All

Whats Holding Sri Lanka Back?

Posted in October 2012

the total 225 seats). This scenario is even worse when it comes to the district level. In 16 of the 25 districts, the proportion of female representation at the national parliament is 0.1% . According to the Sri Lanka Human Development Report 2012, political parties are the single biggest barrier to womens greater participation in politics. Males are preferred over females, both by political parties and voters, to be nominated and to be elected. Reasons for the low representation of women in politics start at the personal level, where fewer women than men self-elected themselves for a political career because of socio-cultural, economic, and psychological barriers . The vicious climate of violence in the election process has also become an influential factor in discouraging interested females from entering the political arena. Be employed or not to be employed? In Sri Lanka, labour force participation by females is lagging behind their male counterparts, remaining stagnant at 30% for many years. This means that despite the Sri Lankan economys heavy dependence on women (tea, apparels, and migrant worker remittances), more than half of the females in the work force are not engaged in any kind of economic activity and their capabilities are under-utilized. National-level data also reveals that the unemployment rate is higher for women with higher educational attainments, implying that investments made on them are not generating the expected economic returns to the country. Labour force participation for women depends much more on the social context than it does for men. Factors that appear to have no effect on male participation in the labour force do affect the level and trend of female employment. For example, other than the standard economic variables such as education, experience, wages and income, many non-economic variables, like marital status and fertility, influence the female labour supply. The

social context would dictate that women are expected to play many roles in their day-to-day lives. Despite being engaged in productive activities (being employed), women also have to engage in reproductive activities, and social activities. This sets a triple burden on women. It creates career related stress for female employees adversely affecting their productivity, necessitating more time off, restricting their ability to undergo rigorous training locally and overseas, and working overtime.

Fixing poor political representation and low labour force participation can boost the countrys human development indicators, argues Sunimalee Madurawala.
According to the Sri Lanka Human Development Report 2012, launched recently by the United Nations Development Programme (UNDP), Sri Lanka ranks at 97 out of 187 countries scoring 0.692 on the Human Development Index (HDI) . A key part of HDI for a country is the Gender Inequality Index (GII) which measures inequality in achievements between women and men. Calculation of GII is also based on three dimensions; reproductive health (measured by the maternal mortality rate per 100,000 live births, adolescent fertility per 1,000 women aged 15-19), empowerment (measured by parliamentary representation and the percentage of people who have at least lower secondary education in the age group of 25 years and over), and labour market (labour force participation rate for the 15-64 age group). Sri Lanka is widely acclaimed as having established excellent human development at a relatively lower level of economic growth. Although Sri Lanka is categorized as a country with medium human development with a GII rank of 74, health and education indicators for Sri Lanka are as good as countries with very high and high human development. With such good performances on health and education indices, what is holding back Sri Lanka from further improving its standing in the HDI? According to the comparable data given in the table below, the problems lies in the poor female representation in the national parliament and low female participation in the labour force. 13 to represent 10 million Sri Lankan women are more educated,

and participate in the labour market more actively, than most of their regional counterparts. At the community level too, we can observe that females are as actively engaged in social activities as males. The majority of the members of Community Based Organizations (CBOs), such as funeral assistance societies and microfinance societies, are females. In nearly every village in Sri Lanka, womens societies serve the community in many ways. Sri Lankan culture itself promotes and ensures a womans dignity and her place in the society. Sri Lanka has produced the worlds first Female Prime Minister, and elected its first female Executive President in 1994. In such a context, it is quite surprising to see poor political participation by Sri Lankan women. This is not a recent trend but a phenomenon observed since independence. Even though the majority of the countrys population is female, there are only 13 female parliamentarians in the current parliament, of which 3 are from the national list (less than 6% of

Despite being engaged in productive activities (being employed), women also have to engage in reproductive activities, and social activities. This sets a triple burden on women.
Traditional familial responsibilities of a female, especially as a mother, constrains women in their choice of employment, as do her familys and societys attitudes towards certain types of employment, that keep the job market segregated by gender with certain jobs being classified as masculine or feminine. Further, costs related to maternity and child care benefits that need to be borne by employers create gender discrimination against females. Work Related Costs (WRC) tends to rise with marriage and children, thus affecting the balance of benefits and costs of being employed.

Breaking the Barriers It is true that attempts have been made by several interested groups to increase womens political participation, including through lobbing and advocating. But progress is rather slow as what is required is a system change. Womens political participation should be encouraged from the very bottom (i.e., at the local government level). In this context, abolishing the preferential voting system (which is seen as the main reason for political violence ) at the local government level, and passing the new Local Authorities Election Amendment Bill and the Local Authorities Special Provision Bill by the national parliament, can be regarded as a good move. Strong commitment by members at the highest level of political parties is another crucial factor in increasing female political participation. Women, on the other hand, have a responsibility to be vigilant; to vote, and elect women who can address their problems and issues effectively. Low labour force participation by females can be reduced by addressing issues arising due to non-economic factors (i.e., marriage, children, etc.). More efficient government intervention in this regard, for instance, regulating and monitoring existing day-care centers and crches, is a practical step that should be taken immediately. More formalized regulatory framework would also encourage the private sector to make more investments on day-care centers and crches and thereby, close the gap in supply. Research on female labour market issues also suggest that the provision of an allowance to working mothers, in order to cover child care costs (for example, Child Care Benefit (CCB) payment in Australia and Universal Child Care Benefit (UCCB) in Canada) would be beneficial to employees as well as to the economy as a whole, as it would bring down the Work Related Costs of working mothers and, thus, encourage them to remain in employment . Comment: bit.ly/YJGp61

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International Trade

Sri Lanka Must Stay Alert

Rank 1 2 3 4 5 6 7 8 9 10

Number imposed EU27 (302) Russia (169) Argentina (141) India (74) UK (67) Germany (64) France (61) China (60) Italy (56) Brazil (54)

Number of tariff lines affected Vietnam (931) Venezuela (786) Kazakhstan (732) China (701) EU27 (656) Nigeria (599) Algeria (476) Argentina (467) Russia (446) India (401)

Number of sectors affected Argentina (63) Algeria (62) EU27 (57) China (52) Nigeria (45) Russia (45) Germany (44) Kazakhstan (43) USA (43) Ghana (41)

Number of trading partners affected China (193) EU27 (187) Netherlands (163) Germany (155) Poland (155) India (153) Indonesia (153) Belgium (152) Finland (152) Argentina (151)

Source: Evenett, Simon J., 2012, Debacle: The 11th GTA Report on Protectionism, London: Center for Economic Policy Research.

Posted in October 2012

Ashani Abayasekara writes that trade protectionism is raising its ugly head through subtle yet substantial ways, and the Sri Lankan export sector must keep a close watch. Some of the top offending countries are Sri Lankas leading trading partners.
Global trade is under strain. You can hear the acid of protectionism starting to drip-drip-drip on the mechanism of global trade. It hasnt penetrated the structure yet, but it is starting to stain the surface, is how Douglas Paal, of the Carnegie Endowment for Peace in the USA, characterized the emerging trend1. It was expected that the 1930s style protectionism of SmootHawley tariffs1 would be unlikely after the 2008/09 global economic crisis. This has certainly held true as trade wars using tariffs as a principal protectionist tool has not taken place. In fact, at the G20 Summit in Seoul in 2010, while the crisis was still burning, leaders of the grouping of developed and emerging economies strongly affirmed that protectionist measures will be restricted. But as global economic prospects have continued to dip, so has the resolve by countries to
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refrain from protectionist measures. Several reports have sounded the alarm. A joint WTO-OECD-UNCTAD report2 released in May 2012 shows that since mid-October 2011 the G20 economies which account for a vast majority of the worlds economic output and trade have added 124 new restrictive measures affecting about 3% of global imports and nearly 4% of G-20 trade. A report3 released by the European Union (EU) identifies a staggering increase in protectionism in recent months with a 25% rise in trade-restrictive measures. The latest Global Trade Alert (GTA) report4 which monitors trade tensions demonstrates that protectionism in 2010 and 2011 was significantly higher than previously estimated, representing a 36% increase, with many more measures to be implemented in the pipeline.

Harder to Detect Trade protectionism isnt always optimal as it could often translate into lost commercial opportunities, threatened jobs, and slower economic recovery. As pointed out in the GTA report, the recent rise in protectionism has not been very conspicuous because protectionist measures have taken new and subtle forms, many of which are not captured by existing WTO prohibitions. For instance, the GTA report5 identifies 101 out of the 132 new protectionist measures adopted in the fourth quarter of 2011 as forms of discriminatory state intervention other than traditional trade defense measures or tariff increases. Such measures, termed behind-the-border or creeping protectionism include environmental clauses, discriminatory investment measures, export subsidies, discriminatory bailouts, and wage subsidies. G20 Main Culprits The GTA report shows that the G20 is responsible for the bulk of protectionist measures and that the share is on the

rise. In 2009, approximately 60% of all protectionist measures were taken by G20 countries, and this had risen to 75% by 2011 and to a further 79% by June 2012. Moreover, as pointed out by the WTO, it is worrying to note that the more recent surge in trade protectionism appears to be no longer aimed at dealing with the effects of the global crisis, but rather at trying to fuel recovery. Its not just the developed country members in G20 that are contributing to this trend; these measures are steadily rising in emerging markets including China, Vietnam, India, Russia and Brazil too (Table 1). China ranks first in terms of the number of trading partners affected by discriminatory measures and third and fourth in terms of the number of sectors and number of tariff lines affected, respectively. Results of a study which attempts at identifying the most harmful state measures to the world trading system indicate that China appears top on the list, with the measure of export tax rebates affecting 243 tariff lines and 155 trading partners.6 Vietnam is another top offender, affecting the highest number of tariff lines, while Russia has imposed the second highest number of discriminatory measures. India has also imposed a significant number of protectionist measures and has in turn affected a high number of its trading partners. In fact, compared to a ranking based on the total number of discriminatory measures implemented, India is among the four top economies to move up the list of offending G20 nations. Trade Tensions Mounting trade tensions between China and the US is another cause for concern, as it could further dim the already gloomy economic outlook. Frictions have increased as China and

the US both focus on the high-end manufacturing sector including new energy and materials. US protectionism has been shifting from traditional sectors to emerging ones. In the past two years, the US has launched a host of trade investigations targeting Chinas newenergy products.7 Signaling a further rise in trade protectionism, the US set up the Interagency Trade Enforcement Center in February 2012 to investigate unfair trade practices from its major trading partners. Moreover, trade investigations from the US have also prompted other nations to follow suit.8 Sri Lanka - Staying Alert Rising protectionist trends in both the developed world and emerging economies could have significant repercussions for developing and least developed countries, in particular for countries that depend on external demand for its goods and services to sustain growth. As a small open economy, Sri Lanka is dependent to a large extent on external demand both to sustain domestic growth as well as to earn foreign exchange for its import expenditures. The recent decline in absolute export earnings of the country in addition to a declining share in world exports and exportsto-GDP ratio is a significant concern. The fact that Sri Lankas key trading partners the US, EU and India feature top on the list of countries imposing the highest discriminatory measures is possibly the most worrisome part of this whole discussion. The escalating trend of discreet yet damaging trade restrictive measures will no doubt pose a considerable challenge to Sri Lankas export growth drive. Comment: bit.ly/YJGsyK

COMMENTS:

Global Trade Protectionism is Rising Discreetly

Table 1: Highest Imposers of Discriminatory Measures

R.M.B Senanayake How relevant are these measures for us. We lost GSP Plus from the EU because of our human rights violations and the Government refuses to apply for them again, preferring to take a loss of almost i billion dollars according to some calculation. Our trade with China is only about 2%. As for European protectionism the main problem is that the EU wants to protect agriculture. We will lose if India goes the protectionist way. But India has offered us CEPA which is the way out of protectionism. But our suspicion of India prevents us from accepting it. We ourselves need to resort to protectionism at least until we make our cost structure globally competitive after holding the Rupee constant for so long despite higher differential inflation. We have to regain competitiveness by Rupee depreciation. So we need to protect our agriculture at least for a time. Global protectionism after 1929 dragged out the depression. Hope it will not happen again. But DOHA Round is dead and the way forward is only through Regional Free Trade Agreements. If we miss the Indian offer we will be a write -off Ashani Thank you for your input, Mr. Senanayake. Some of these measures have a significant impact on us. For example, India recently banned its cotton exports to ensure supply for domestic industries, which would have no doubt impacted Sri lanka, given that India is our largest source of cotton imports. As you rightly point out, it is thus crucial to to fully leverage on trade agreements available to us particularly the CEPA which can offer us considerable potential in tapping into the Indian market.

Endnotes: 1 The Growing Threat of Global Trade Protectionism, http://carnegieendowment.org/2010/09/28/growingthreat-of-global-trade-protectionism/40ef 2 The Smoot-Hawley tariff act was an act sponsored by Senator Reed Smoot and Representative Willis C. Hawley, and signed into law on June 17, 1930, that raised US tariffs on over 20,000 imported goods to record levels and which reduced US exports and imports by more than half. 3 http://www.wto.org/english/news_e/news12_e/ igo_31may12_e.htm. 4 http://trade .ec .europa.eu/doclib/press/index. cfm?id=804 5 Evenett, Simon J., 2012, Debacle: The 11th GTA Report on Protectionism, London: Center for Economic Policy Research. 6 Evenett, Simon J., 2011, Trade Tensions Mount: The 10th GTA Report, London: Center for Economic Policy Research. 7 Evenett, Simon J. and Johannes Fritz, 2012, Jumbo Discriminatory Measures and the Trade Coverage of CrisisEra Protectionism, Center for Economic Policy Research, GTA Analytical Paper No. 3.. 8 One example is the launching of US anti-dumping investigations against Chinas leading solar panel manufacturers. 9 The imposition of anti-dumping duties by the US on Chinese-coated paper in 2006 prompted Brazil, Argentina and Thailand to launch similar investigations.

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Climate Change

Economics of Global Climate Change

New Innovations on Mitigation, Adaptation and Research

There is a growing emphasis on preparing for climate variations by encouraging adaptation - a process whereby societies improve their ability to manage climate risks and fluctuations. Viewing local adaptation as contributing to a long-term ability of local populations to cope with climate risk calls attention to wider social and economic drivers of vulnerability.

By Chatura Rodrigo

There is an increasing competition for renewable and non-renewable natural resources in the world today. This competition has resulted in the over use of natural resources while creating environmental problems such as waste generation, soil degradation, ecological and biodiversity degradation and, most critically, greenhouse gas emissions. Among all these impacts, greenhouse gas emissions is considered the foremost challenge in the world today as it fuels global climate change. Over the years, scientists and economists have argued on the effects of greenhouse gas emissions which could possibly be solved through either mitigation or adaptation. Some of the new technologies proposed by scientists, however, are often not feasible for developing econ20 TE DIGEST Jul - Dec 2012

omies. Therefore, new innovative approaches, especially on the policy front, are needed. At the moment, the popular policy tools are carbon taxes or the auction of emissions permits. Over recent years, however, economists have come up with new and innovative methods of mitigation, adaptation and research in dealing with global climate change. Innovation in Mitigation: Green Credits Economists have recently come up with the concept of Green Credits, which is broadly based on the popular mechanism of consumer reward schemes (such as frequent flyer miles and loyalty points). However, while such retail schemes reward people the more they fly or shop, in Green Credit schemes, the

government rewards citizens the more they reduce their environmental footprint. Green Credits have clear cash or tax-deductible value, which is the reward component of it. The government awards Green Credits for verifiable actions that reduce carbon emissions, such as reducing electricity or heating fuel consumption, increasing home insulation, installing a renewable energy heating source, switching to a hybrid vehicle, etc. For example, if a household reduces its electricity consumption by 100 kilowatt/hours (kWhs) or heating oil consumption by 100 litres, the government could award them 100 Green Credits. At the end of the year, the citizen or business either banks its credits,

or redeems them as a tax benefit or cash reward, whichever is most desired. The government could choose to value Green Credits in some way other than a cash rebate or tax deductions. There are certain advantages in using tax deductions in terms of encouraging social change. The key point is that the value of a Green Credit should be real, clear, and easy to understand. The government, meanwhile, funds Green Credits from revenues generated from carbon taxes on big polluters such as industries and utilities, for instance. A direct tax is more appropriate for these large corporations. The government can also redirect funds already set aside for individual and small and medium sized business carbon reduction schemes. A Green Credits scheme is built on individual incentive and reward for verifiable carbon reductions or other initiatives that fit a governments green agenda. It is simple to understand, as almost everyone is familiar with consumer reward schemes. The reward scheme approach and is less complex than individual carbon quotas and cap-and-trade mechanisms, and less confusing than the myriad of different incentives that are now common. A Green Credits scheme will also be relatively quick and cheap to implement. Technology to support reward schemes is readily available, cost-effective and proven. A government would not need to develop new technology, and, if preferred, could outsource the operation of a Green Credit scheme to an experienced service provider. Innovation in Adaptation: Social Innovation The concept of social innovation draws attention to the broader, collective dimensions of the adaptation aspect of global climate change. As suggested by many studies, the effects of climate change are most pronounced among poor and marginalised populations whose livelihoods are primarily natural resource-based, and where climate change has a potential long-term impact on local social-ecological systems. There is a growing emphasis on preparing for climate variations by encouraging adaptation

Image by: Anushka Wijesinha

- a process whereby societies improve their ability to manage climate risks and fluctuations. Viewing local adaptation as contributing to a long-term ability of local populations to cope with climate risk calls attention to wider social and economic drivers of vulnerability. Climate action is increasingly viewed as an integral part of sustainable development, contributing to both equity and environmental integrity in the long term. Sustainable policies for climate change adaptation need to feed on local knowledge, experiences and ideas. However, in doing so, the decision making authorities must clearly identify the different power dynamics of the communities as well as their perceptions. Different communities might have different perceptions on the climate change issue, which is largely based on their experiences as well as their awareness. Therefore, in formulating adaptation policies that involve society, everyone has to be brought on to the same level of understanding for the interventions to be successful. Innovation in Research: Empirical Methods Economists over the years have used many techniques to investigate the impact of climate change on the economy of a country. However, with the complex nature of climate change, that affects all parts of the world with varying intensities, many of these techniques have become contentious of late. Increasingly, more countries are using decoupling indicators to measure the relationship between carbon dioxide emissions and economic development. Decoupling indicators were originally used to reflect the asynchronous changes in the relationship between environmental pressures and economic growth. But now these are being applied to measure the relationship between carbon dioxide emissions and economic development. There is an increasing demand to use decoupling techniques to identify the relationship between greenhouse gas emissions and economic growth involving multiple areas, such as transportation, energy consumption, resource utilization, agricultural policies and so on. However, most decoupling studies only take in to account a

single country or a single region. There is little research focussing on cross-country and cross-regional comparative analysis. Moreover, the target research period is generally short, which is not conducive to study the decoupling relationship between carbon dioxide emissions and economic development which require a longer time series analysis. Studies have found that the decoupling elasticity in developing countries is significantly higher than in developed countries. Furthermore, studies suggest that it will take a longer time for developing countries to achieve developed countries decoupling achievements mainly due to the proliferation of green technology and emergence of markets for green products. Conclusion Over recent years, innovative techniques are emerging from the policy and research arena in dealing with climate change. Some of these measures are already in use, while others need more validation and further research. Yet, it is encouraging to see the development and application of new tools as the battle against the climate change, through a collective effort, intensifies. Therefore, it will be interesting to see how these new applications would work in the developing world, especially innovations like Green Credits.
References Jonathan M. Haris and Brian Roach, The Economies of Global Climate Change, Global Development and Environment Institute, Tufts University, 2009 Ron Dembo, Green Credits: A Unique and Innovative Program for Governments to Reduce Carbon Emissions of Individuals and Business, Zerofootprint Foundation D.R Taylor, M F. Olwig and N Chhetri, Adaptation as Innovation, Innovation as Adaptation: An Institutional Approach to Climate Change, Applied Geography, 2011 Andreoni, S., & Galmarin. Decoupling economic growth from carbon dioxide emissions: A decomposition analysis of Italian energy consumption. Energy, 2012 X. Ru, S Chen and H. Dong, An Empirical Study on Relationship Between Economic Growth and Carbon Emissions Based on Decoupling Theory, Journal of Sustainable Development,Vol 5 (8), July 2012 Innovations for Greenhouse Gas Reductions: A Life Cycle Quantification of Carbon Abatement Solutions Enabled by the Chemical Industry, International Council of Chemical Associations, July 2009

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SPECIAL ISSUE

Down the Concepts

Invention vs. Innovation Whats the Difference? Many up-and- coming entrepreneurs share the common misconception that invention and innovation are one and the same. Should the initiation and subsequent development of invention and innovation be strictly handed over to people wearing white coats in labs? Defining the innovation problem is often overlooked, but it is essential to comprehend the distinction between the two in order to better calibrate policies. Here is a framework that will help. In its purest sense, invention can be defined as the formulation of new ideas for products or processes. Innovation, on the other hand, is the practical application of new inventions into marketable products or services. That is, innovation occurs if someone improves on or makes a significant contribution to an existing product, process or service. For instance, Tim Berners-Lee invented the worldwide web (internet). Mark Zuckerberg then used the internet to define social networking that required innovation. Presented with the choice to invent or innovate, most entrepreneurs would choose the latter. But the truth is that innovation alone is not enough. Too often companies focus on a technology alone rather than the customers needs. In order to transform a great idea into a world-changing innovation, it is imperative to align these ideas with the strategic objectives of the organization. In other words, smart innovators frame their ideas in ways which are compatible with the existing market landscape, and their companys position in that marketplace. Is it just about more R&D expenditure? A break-down of the term R&D (research and development) is important - what does this concept really entail? Given that innovation is typically the commercially successful exploitation of ideas the common understanding is that a process of research and development is necessary to achieve this state. Contrary to this belief the poster child for innovation, Steve Jobs, states that innovation has nothing to do with how many R&D dollars you have. Further, the consultancy Booz Allen completed a study of the top 1,000 R&D spenders among public companies globally in 2005. Based on Booz Allens analysis, they concluded, Contrary to conventional assumptions, R&D spending levels within the Global Innovation 1000 had no apparent impact on sales growth, gross profit, operating profit, enterprise profit, market capitalization, or total shareholder return.1 The explanation behind this phenomenon could be that companies focus more on the research aspect rather than the development aspect of R&D. That is, they spend too much time on re-

Breaking

Innovation, Invention, R&D

RESEARCH
Scientific investigation Invention

Develop prototypes Testing and review Feedback

DEVELOPMENT
search and technology development but too little time applying these findings to suit the market landscape, consumer wants and strategic goals of the enterprise. Clearly, consumers must come first as it is they who drive demand for the marketed product or service. Is innovation just about products? At the most basic level there are two extensions to innovation process and product innovation.
Product innovation involves launching new or improved products (or services) on to the market. It could facilitate the creation of new markets, especially if new technology creates different products for consumers. Product innovation can also be associated with subtle changes to the characteristics of an existing product which enhances product performance and quality. Process innovation involves finding better or more efficient ways of producing existing products, or delivering existing services. It involves changes to the way in which production takes place, whether it is in manufacturing, business logistics or management of the employee base. Firms can benefit through a lean cost structure facilitated by process innovation.

This groundbreaking special edition of Talking Economics tackles what is clearly now a critical public policy issue of our time Innovation. This is true both globally and locally. In a series of articles by IPS researchers and guest contributors together with compelling editorial content, this special edition takes a closer look at the concept of innovation, uncovers the innovation dynamics of some of the worlds top firms, presents interactive insights from young local technology leaders, discusses Sri Lankas status quo and policy priorities in driving innovation (especially through nanotechnology), and provides a clear agenda for the countrys future.
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Aside from a more efficient use of resources in production, firms can also enjoy higher profits as a reduction in cost can cause an outward shift in market supply, providing scope for businesses to profit. An example might help differentiate these two concepts better. If a Sri Lankan porcelain tableware manufacturer was to develop a new type of porcelain tea pot that, through the embodiment of nanotechnology features, was able to keep the contents of the pot hot for hours on its own that is an example of a product innovation. Whereas if the same manufacturer tweaked its production process which cut down the time taken to fire items in a kiln by, say, 50 per cent, which in turn reduces costs and increases production capacity that would be an example of process innovation. In summary, what does innovation entail?
Improving or replacing business processes Developing entirely new and improved products and services Adding value to existing products, services or markets to dif ferentiate from competitors.

Endnotes 1 Bordia, R., Dehoff, K., Jurelzekski, B., The Booz Allen Hamilton Global Innovation 1000: Money Isnt Everything, Strategy + Business, Winter 2005, p. 5

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The Narrow Human Resource Base in Science and Technology Could Constrain Sri Lankas Knowledge Economy Ambitions
By Harshanee Jayasekera and Nisha Arunatilake

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Figure2: HRST Count in Sri Lanka vs. Selected European countries (as a percentage of total HRST count)

60

40
NETHERLANDS NETHERLANDS NETHERLANDS GERMANY GERMANY GERMANY SRI lANKA SRI lANKA SRI lANKA

FINLAND

FINLAND

SWEDEN

SWEDEN

SWEDEN

20

FINLAND

UK

UK

0 "Graps" "S&T Grap- loyees "S&T Employees

Source: Own calculations based on 2009/2010 Labour force Survey Data, Department of Census and Statics and Eurostat database

Benchmarking Sri Lanka ____________________________________ Compared to other countries, only a small percentage of Graps in Sri Lanka remained unemployed or employed in jobs for which they are overqualified. It is likely that these graps are queuing for government employment. However, given that most of the graduate output from state universities is in the fields of Arts and Humanities (nearly 60% in 20101), the possibility of these graps actively contributing towards an innovative economy is, arguably, low. For the most part, S&T grap-loyees are the drivers of innovation. A detailed look at the S&T grap-loyees in Sri Lanka shows that close to half of them are teaching professionals. The likelihood of these workers innovating is small (except, possibly, university academics). Higher skilled workers are more likely to be able conduct research and development to create new technologies and to profit from existing know-how. The level of skills that often lead to innovation comes largely from higher education.

Around the world, knowledge and innovation have become the drivers of global competitiveness. Countries are competing with each other to invest more on Research and Development (R&D) to help create more novel technologies to gain comparative advantages in knowledge. Workers in Science and Technology (S&T) are a key element of this. Towards understanding Sri Lankas development prospects from a human resource perspective, this article hopes to define and quantify the S&T human resources in the country and assess the quality of the S&T workers for their innovative potential.
Measuring Human Resources for Science and Technology ____________________________________ Measuring the stock and flows of S&T human resources would give a clear picture about the innovative potential of an economy. This calls for a common and accepted measurement to both define this S&T workforce and to compare it across countries. One of the commonly accepted measurements is the Human Resources for Science and Technology (HRST), introduced by the Canberra Manual in 1995. HRST is a broad definition encompassing those who are educationally qualified with tertiary education, those people working in S&T jobs, and those who are both educationally and occupationally qualified. For easy and memorable reference throughout this article, let each of these groups be referred to as Graps (in reference to them being graduates), S&T employees, and S&T Grap-loyees, respectively. According to authors calculations using available data, the count of HRST in Sri Lanka on average for the years 2009/2010 was 1.6 million people. Out of this, 218,629 were S&T Grap-loyees, while the number of Graps and S&T employees were 129,057 and 1,218,973 respectively (see Figure 1). Ideally, the larger HRST category in a country should be S&T Grap-loyees because it reflects the demand for S&T occupations filled in by persons with suitable skills. But, in Sri Lanka the HRST workforce is dominated by persons only qualified by occupation, i.e., S&T employees (see Figure 2). The dominance of S&T employees indicates that either it is relatively easy for people with less-thanideal qualifications to be employed in S&T occupations, or that better matching is necessary between education and occupational demands.

Therefore it is important that more young people pursue degree qualifications in S&T fields of study. In Sri Lanka, S&T undergraduate enrolment on average between 2008 and 2009 were 2 students per thousand populationiv. Comparatively, in India, it was 3 students per thousand population (2003), and in China it was 7 students per thousand population (2006)2. Compared to these dynamic emerging knowledge economies, Sri Lankas performance lags significantly behind. Constrainining the Knowledge Economy ____________________________________

ly state-funded tertiary education system faces two main challenges - (1) increasing access to tertiary education, especially in S&T subjects, and (2) improving its quality. With more than half of youth between the ages of 20 - 24 not enrolled in any form of education, the former calls for more resources to sustain this inevitable growth of skilled labour demand, while the latter calls for a paradigm shift from Arts and Humanities to science education.

Capacity and resource constraints only allow a thin slice of the students graduating from general education to enter into state universities. Therefore, the growing demand for S&T employees capable of performing in occupations that demand higher levels of skills, will have to be sourced from people who have less than university level education. Even of the few that enter university, many study Arts which is not the kind of educaFigure 1: tion suited towards Sri Lankas S&T Human Resource Base and its Sub-categories building a strong S&T workforce which can Human Resources For Science and Technology engage in high end (HRST) In Sri Lanka (2009/2010) technological and knowledge creation 1,566,658 qualified to be categorized HRST activities. This is not ideal at all, especially for a country aiming to grow as a knowledge-based economy. "Graps" "S&T Grap-loyees" "S&T Employees" HRST only HRST qualified by HRST only With the ever-growqualifies by both education and qualified by education occupation occupation ing human resource demand for S&T oc129,057 218,629 1,218,973 cupations, it is essential that more school leavers pursue university education. However, in enabling this, the almost entire-

Dilani Interesting article.However, according to the National Science Foundations R& D survey, in 2006 Science and Technology Personnel (STP : which is defined according to the Canberra Manual (OECD) ) was 44,068 and it was increased up to 44,655 in 2008 which means that Sri Lanka is moving to a positive direction isnt it? Harshanee Thank you for your input Dilani. Yes it does indicate that Sri Lanka is improving. However, given the broad definition recommended by the Canberra Manual a mere HRST count is not going to be sufficient to assess whether Sri Lanka is going towards THE right direction. As I have pointed out in the body of the article, Sri Lankas HRST is dominated by persons only qualified by occupation. Ideally the HRST count should be dominated by personnel with the right education working in suitable occupations.

Source: Own calculations based on 2009/2010 Labour force Survey Data, Department of Census and Statics

Endnotes 1 Based on data obtained by the University Grant Commission, Sri Lanka (2010) 2 Levin Institute (2009);The evolving global talent pool: lessons from the BRICS countries

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equipment and services and the non-availability of essential tools have stalled progress in Science in Sri Lanka. If we are to benefit from a new opportunity, some bold decisions are needed and it needs to come with commitment from the highest levels of authority. Commitment to nanotech In fact, in developing the National Nanotechnology Initiative (NNI), these pre-requirements were met. Strong decisions often cause opposition as well, and it is instructive to hear the voices of Scientists as well at times. Continuous dialogue and all-round contribution by way of results was what got the nanotech initiative off the ground. With the country poised to take off after 30 years of terrorist conflict, the NNI is quite important. The country has a choice, as one scientist said, of becoming a smart country or a screwdriver economy. It was felt at the National Science Foundation (NSF) and the Ministry of Science and Technology that Science should be channeled for national development and that the emerging arena of nanotechnology offers an exciting opportunity. The NNI in Sri Lanka is an interesting case of a group of enlightened Sri Lankans abroad influencing an equally enlightened group of individuals in Sri Lanka to consider the emerging field of nanotechnology as an opportunity for Sri Lanka to forge ahead in economic development. The idea and the concept were well received by the Ministry of Science and Technology (now the Ministry of Technology and Research) along with the NSF which spearheaded the drive with the blessings of the H.E. the President. In fact, the President was briefed in detail quite early by a visiting Scientist whose presentation received his full attention. This prompted a Cabinet paper cementing the commitment by the Sri Lankan state to this cutting edge project. The presentation to the President took place

in November 2005, after which the NSF took a key role in moving the initiative forward. The support given by the Head of State was vital for the initiative to take off and this should be acknowledged. The Cabinet memorandum titled National Nanotechnology Initiative was presented to the Cabinet by the President and the Minister of Science and Technology and the approval given on 23rd August 2006. The objectives were to generate a critical mass of personnel supported by the necessary facilities to innovate at the national level. To promote nanotechnology based research and develop industries and to attract best Sri Lankan expertise, both here and abroad, was an objective from the inception. Today, the government has allocated 50 acres of land for a Nanopark and helped in setting up Sri Lanka Institute of Nanotechnology (SLINTEC). The NSF has already finalized the National Nanotechnology Policy, which would be presented to the Cabinet shortly. Sri Lankas opportunity The national nano initiatives main emphasis is to strengthen the competitiveness of the local industries, add value to national resources, and developing human resources to meet the needs of the industry. It is quite clear that esoteric research is not the aim, and rapid economic results are expected. Speed and the efficiency are closely monitored. Towards the end of 2011, a news item from the USA noted that the global nanotechnology industry output is set to reach US$2.4 trillion by 2015. Even with the global economic recession and dampened enthusiasm in many sectors, the global market for products incorporating nanotechnology is projected to grow at an annual growth rate of 11.1% between 2010 and 2015 to reach this value. As of 2011, a total of 175 different types of consumer nano products have been identified in nine different sectors.

Prof. Ajith De Alwis is a The Emerging Lecturer at the DepartNanotechnolment of Chemical and ogy Project of Process Engineering, Unithe US Woodversity of Moratuwa and row Wilson was formerly the head of Centre reSLINTEC. He holds a B.Sc. Eng. from the University of cords around Moratuwa and PhD from 1345 products University of Cambridge. of nanotechnology in the Talk to Prof. De Alwis general conajith@cheng.mrt.ac.lk sumer segment. This should be exciting news for Sri Lanka. The planning community should be interested in knowing more, supporting more and embedding more of this type of innovation-led endeavours in future planning We are about to discover that Sri Lanka is a treasure island in this nano era. The objective of giving Sri Lankan science a new lease of life and adding pride to the label Made in Sri Lanka would hopefully be an outcome of the countrys nanotechnology drive. But its realization, in any meaningful manner, needs the engagement and commitment of all players in the economy, especially the key decision makers.

Nanotechnology in Sri Lanka:

A New Beginning with a New Technology but

by Ajith De Alwis
Across the globe another technological revolution is shaping up. The new revolution is termed Nanotechnology controlling and manipulating matter at atomic scale for economic and social benefit. Unlike other industrial revolutions, this is open to anybody who has a sense of importance and an understanding of science and technology. As capabilities increase in leaps and bounds and the information revolution creates a flatter world, the right mindset can grab these new opportunities offered. Globalization has its positives and negatives, but as this process is nearly irreversible, it is important that we take up the positives and capitalize on them. More than 70 countries in the world
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have their own nanotechnology initiatives. Today, Sri Lanka has joined in this with its own initiative, but the leadership given to this initiative by key decision makers is still weak. One wonders why this is the case. Why are we so conservative when it comes to innovation and risk taking, which is a characteristic that sets nations apart? Countrys can, and should, benefit from technology Sri Lanka had, unfortunately, failed to benefit from earlier technological revolutions in any meaningful manner. While Information technology has transformed Bangalore in India, in Sri Lanka, we are still only thinking in terms of Business Process Outsourcing (BPO) opportunities. Forays into biotechnology have created millionaires in India. Indias richest woman started her industry with extracting enzymes from papaya. In Sri Lanka, much of our fruits go to waste close to 50%! This is far from ideal. We still have tussles over plastic crates when we know that it is useful and can transform agriculture. Sri Lanka over the years has maintained a poor percentage close to 0.13% of GDP into research and development. Much of that again has been spent on salaries and general expenditure, with the result that the scientific infrastructure has fallen grossly behind globally competitive standards. The poor state of

The Institute of Policy Studies is a partner institute in a regional study on Nanotechnology in South Asia: Building Capabilities and Governing the Technology in India, Pakistan and Sri Lanka supported by the IDRC, Canada. IPS is looking at the socio-economic impact of nanotechnology for Sri Lanka. Other partners include the NSF, National Institute of Occupational Safety and Health (NIOSH), SLINTEC, Sri Lanka Standards Institution (SLSI), and Practical Action. Prof. Ajith De Alwis is the Project Team Leader. The lead researcher for the project from the IPS is currently Anushka Wijesinha (Research Economist), and was previously Asha Gunawardena (on PhD study leave).

W.A Wijewardena The work so far done is commendable, but as usual, SL appears to have missed the bus. The world came to know about nano revolution in late 1970s due to the fundamental research done in USA and UK in harnessing nano carbons for a variety of economic applications from energy harvesting to medical application to military work to high tech electronics. But SL knew of it only after the onset of the new millennium and there-again, well into the middle of the first decade. In contrast, Singaporean authorities

in 1999 instructed that all higher education institutions should concentrate on four fields in their curricula and nano was one of them. To meet the challenge, the government allocated some S$500 million to National University of Singapore to do research in nano area. Today, that university is hiring the world famous Nobel laureates to help it to build up the knowledge base. What we do here is thinking big with poorly funded SLINTEC whose birth was mainly due to the participation of a few far-thinking private companies exclusively engaged in garment

industry. SLs electricity producer, badly hit by droughts and high petroleum prices, has not thought of looking at the possibility of harvesting solar power through nano turbines as is being done by a private company called Nano Solar in California. The reason: no challenge because the Treasury pumps up funds to make good its losses regularly. Israeles are used to saying that hard times are the prime drivers of innovation. Without facing hard times by individual ventures, it is unlikely that SL will make a much headway in this area.

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Supporting Start-Up Enterprises

Venture capital, star-up financing, seed investment it may have many names but its role is unequivocal providing new entrepreneurs with investment, mentoring and networking that they may not otherwise have had access to, in order to realise the full potential of an innovative idea. In the editorial of the last issue of the Talking Economics Digest, I mentioned that while many other countries, including in the Arab region, face similar problems to Sri Lankas in terms of unemployment and creating opportunities for youth, they are also finding solutions which Sri Lanka must sit up and take notice of. I noted that, Innovative initiatives like Oasis500 in Jordan, Seed Start Up in Dubai and Plug and Play in Egypt are fostering a network of mentors, investors and incubators to help to fill finance and skills gaps for young people. So in this issue we decided to take a closer look at a couple of these, as well as look at a similar effort taking shape in Sri Lanka. We also take a quick look at previous attempts at venture capitalism in Sri Lanka and why it failed. Editor SeedStartup
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Heres a look at some of the worlds top firms and what innovation means to them and what is has meant for their stellar business performance
tion is becoming increasingly fierce but innovative ideas are gaining momentum as funds are investing in new ventures. SeedStartup is an international startup accelerator and seed venture fund located in Dubai, with a global approach and a focus on digital media (web, mobile, software) start-ups. Applications are lodged from around the globe and 5-10 are selected to participate in the program in Dubai. Participants then undergo a 3-month program inclusive of mentoring, seed investment (up to US$25,000) and networking and introductions to sources of follow on funding. Entrepreneurship is on the rise. Especially in the last three years were really starting to see a huge upswing in entrepreneurial enthusiasm. Also more and more VC funds are being launched. Its a very encouraging thing and its also a great time to be an entrepreneur as well as an investor in the Middle East, said Rony El-Nashar, founder and managing partner of SeedStartup in the UAE. The purpose throughout the duration of the program is for entrepreneurs to build and refine their products under the guidance of their mentors who can increase the start-ups chances of success. By the end of the program, entrepre-

estate and traditional businesses, to turn to the more exciting and often significantly higher return area of ICT, Mobile Apps, and Digital media. Entrepreneurs who survive the training are eligible for funding of JD 10,000, and those who manage to thrive after the first stage of incubation are eligible Previous Efforts at VC in Sri Lanka and the Bankers Trap The VC industry in Sri Lanka emerged in the early 1990s, resulting from a government decision to provide fiscal incentives for VC funds (tax deductibility for investment in approved VC funds and a 10-year tax holiday for VC profits). The two development banks at that time, National Development Bank (NDB) and Development Finance Corporation of Ceylon (DFCC), one state bank, Peoples Bank, one private bank, Commercial Bank, two investment banks, DCIC and Asia Capital, and one finance company jointly with another private bank, Central Finance/Hatton National Bank (HNB) floated VC subsidiaries, launching 7 VC funds. In the years 19931996 they made 76 investments, an average of just over three investments per year, per fund. A study funded by USAID and conducted by an American expert John Burr revealed that the performance of only 1 out of the 101 investments made by these VCs truly qualified as a successful VC investment in terms of a return equal to a significant multiple of the value of the original investment. This was Millennium Information Technologies (MIT). PVIC was the only company to invest in MIT when it first bid for the computerization contract at the Colombo Stock Exchange. PVIC invested LKR 7.5 million in 1996. In 1999, PVIC sold its stake to a foreign fund for LKR 43 million, a 573 per cent return on investment. Subsequently, MIT sold out to the London Stock Exchange for US$ 30 million. The defining feature of all these VC companies, as clear from the list of VCs given above, was that they were all subsidiaries of banks. The Directors of these companies were largely veteran bankers. Even much of the senior management were taken up by bankers seconded from the parent companies. Essentially, the funds

for a further JD, 50,000. Successful entrepreneurs who manage to get their seed investment from Oasis500 have the opportunity, over a 3-month period to accelerate and achieve milestones that others would take a longer time to achieve without the same level of assistance. This gives them a significant competitive edge. were managed by bankers with a bankers mindset rather than by venture capitalists with a venture capital/risk capital mindset. As the VC companies rarely had industry experts, enterprise experts, and those with strategic business development expertise, these funds did not really pick winning firms, i.e., firms with high intellectual capital and extremely strong upside potential if the right guidance and hand-holding was provided. By the early 2000s, many of the companies invested in by the VC funds had either returned only modest returns or had under-performed completely, and consequently, many of these VC funds themselves failed. Lanka Angel Network With the aim of assisting innovative Sri Lankan start-ups to accelerate their growth Blue Ocean Ventures (BOV), a Sri Lankan BOI-approved venture capital, was set up in 2010. BOV provides the necessary funding and support for local talent to make a global mark. In order to accelerate the entrepreneurial ecosystem in Sri Lanka BOV tied up with the Indian Angel Network in 2012 to launch Venture Engine (VE), an innovative new platform that helps turbocharge the startup ecosystem in Sri Lanka. The goal of VE was to help Sri Lankan entrepreneurs accelerate their business to the next level via access to potential investors and develop stronger business plans. Over the last year, VE has been involved with several other annual start up events to help develop this ecosystem. VE was instrumental in creating the Hackathon where ideas were created over a weekend. VE also partnered with the Academy of Design to create the business launch at the Sri Lanka Design Festival where the top design entrepreneurs got funded. Currently VE has partnered with the Ceylon Chamber to launch Spark IT for ICT Entrepreneurs.

Moreover, the Oasis500 Angel Network serves ICT, digital media and mobile companies by preparing them for funding by venture capitalists and private equity funds. Their goal is to provide a platform to showcase pre-selected startups looking for angel capital, to potential angel investors. All these events created a need for entrepreneurs to get access to funding throughout the year. This prompted the formation of the Lankan Angel Network (LAN). LAN is a group of investors who have a passion for promoting Sri Lankan entrepreneurship. LAN comprises of individual investors, venture capitalists, and angel investors. It brings together the Sri Lankan investor and mentor community to scale up startups. LAN identified key challenges that entrepreneurs face at each stage of their life cycle and helps them overcome these and accelerate their business. The active investors meet every second Thursday of the month to look at business plans/proposals sent to the network. The selected entrepreneurs get invited to give a five-minute pitch and if successful, get mentoring and funding assistance. LAN also has set up ethical practice, which governs investor behavior and protects the entrepreneur. Managing Director of BOV Mr. Prajeeth Balasubramaniam said, "Sri Lanka was lacking an entrepreneurship ecosystem, especially capital sourcing and angel investing were hard to come by. Sri Lanka has entered an era of unprecedented growth in all sectors. Opportunities to build new businesses are increasing, and at a time like this, VE and LAN will help perfect those entrepreneurial solutions to grow successful businesses. We are hoping to provide the ideal start-up platform through these programs. LAN members receive a minority stake in the company, leaving the entrepreneur in control. The members bring business building experience, functionality experience, Industry experience, contacts for partners, customers and follow-on financing. The network looks for clear path to profitability, solid management, realistic business plan, scalable business, competitive edge, market acceptance, realistic financial projections, realistic valuation and a well-articulated exit strategy for investors.

neurs would have built on and marketed their new product, and strategically positioned themselves to raise their next round of funding from angel investors and venture capitalists. SeedStartup acts as a platform for want-to-be entrepreneurs to successfully market their early-stage product. Oasis500
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In the span of a few years the Middle East has seen an escalation of seed startup venture capital (VC) funds. Competi-

Oasis500 is a leading early stage and seed investment company located in Jordan which looks for enthusiastic entrepreneurs with either a feasible new idea or an existing startup, funding up-to 500 startups in the technology sector. It is the first of its kind in the Middle East and North Africa (MENA) region. The program at Oasis500 includes entrepreneurship training, mentoring, incubation, sound legal advice, and additional follow-up funds if required. The training boot-camp is extensive and covers all business aspects including, business modeling, financials, pitching, facilitation and marketing, among others. The experience here, nurtures creative ideas in Information and Communication Technology (ICT) and Mobile and Digital Media, transforming them into startup companies. Oasis500 addresses the lack of seed and early stage funding for technology ventures in the MENA region. They help to overcome a challenge faced by many, which is the difficulty in obtaining funds when a new business startup really needs to grow and has no real revenues or a solid track record. The program of Oasis500 bridges this gap and will keep these new startups afloat by giving them the seed, early-stage, and follow-on funding that they require. Dr. Usama Fayyad, Executive Chairman of Oasis500, says We hope to change the investment culture in this region from having a strong focus on real

Image courtesy www.thenational.ae

References Mahmood, Hina. (2012) SeedStartup: Riding the wave of Entrepreneurship in the Middle East,Your Middle East, 11 May. Mansoor, Zainab. (2011) Oasis500: A Technology Startup Accelerator from Jordan, DinarStandard, 1 April. Oasis500 About us (http://ww.oasis500.com/about-us/) SeedStartup What we do (http://seedstartup.com/) Wijesinha (2011), Introducing Venture Capital for Traditional and Small Enterprises in Sri Lanka, Briefing Paper, Policy Strategy Committee, Ministry of Traditional Industries and Small Enterprise Development, April 2011.

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Firm Look
GOOGLE An Organizational Culture that Drives Innovation

By Tehani Welgama

APPLE Innovative Leadership to Facilitate Success Apple has assumed the top spot for being the worlds most innovative company. Successful business leaders, like Apples former CEO the late Steve Jobs, understand the concept of innovation and strive to imprint their behaviours as processes and philosophies within their organisation. Apples performance under Steve Jobs, versus other leaders, powerfully illustrates the importance of innovative leadership. Under his watch Apples net worth increased to become greater than the Gross Domestic Product of Sweden - US$458 billion. Apple is founded on the belief that innovation is creating a new way of doing something which results in positive change. It is Steve Jobss understanding of innovation that is widely communicated and followed at Apple and a few of his beliefs are highlighted below. You cannot inspire unless you are inspired. Jobs passion was not computers. It was creating tools to unleash creativity and enrich peoples lives. A clear, concise vision which is consistently communicated is of utmost importance. A vision allows you to see things others have missed. Sell dreams not products. Focus on customers and satisfying their needs. A good product is one that helps people lead better lives. Jobs said You have to be different to buy an Apple computer. You have to think different. The people who buy Apple computers are creative spirits and looking to change the world. Apple makes tools for them. In their craziness, we see genius. Create insanely great experiences. Steve Jobs believed that you have to start with the customer experience first and then work backward to the technology. It is not just about the product, it is about the customers experience with the product. Following Apples enormous success it is evident that an innovative leader can drive an organization to offer the best and to continuously improve through innovation. Steve Jobs famously once said, Innovation distinguishes between a leader and a follower.

TOYOTA Relentless Pursuit of Process Innovation Toyota, seen as a long time organization of innovation, will forego todays profits in order to dominate the market-place tomorrow. Toyota spent more on research and development (R&D) than any other company in the world in 2011, according to Global Innovation 1000. Aside from an allocation of funds towards R&D, it is important to note that Toyota also invests time, money and effort in product and process innovation to maintain its position as a market leader.

Heres a look at some of the worlds top brands and what innovation means to them and what is has meant for their stellar business performance...
EMBRAER Innovative Strategy of Reverse Outsourcing Embraer, the worlds third largest aircraft manufacturer behind Boeing and Airbus, has thrived not because of their ability to out-compete their respective rivals, but because they were able to find a niche within the industry of small and medium-sized planes. Brazils Embraer has grown steadily since the former state-run company was privatized in 1994 and is now a leading force in aerospace technology and innovation, and has delivered more than 5,000 executive, commercial and defence aircrafts in its 40+ years, now operating in over 90 countries. Embraer has innovation as one of its core corporate values. Owing to this fact, the company received FINEPs Innovation Award 2012, the most prestigious recognition by Brazils apex innovation agency. Google is a champion of innovation and continues to maintain a reputation as one of the worlds most innovative companies owing to its strong organizational culture. Employees are assigned to small teams and encouraged to propose wild, ambitious ideas in line with the companys philosophy. Further, the prevalence of a flat organizational structure provides employees with easy access to face-time with senior management to present these ideas. Having their ideas voiced at a senior level, appeals to the employees intrinsic needs, motivating them to continuously innovate. We realise the minute we stop innovating is the minute we stop being a leader. Innovation comes from everywhere and is expected and supported in all segments of the company and from people at every level. Googles culture is a combination of things. It is ethical, customer-responsive and spiritual.A noteworthy method used by Google to foster creativity and originality is the Googles innovation time-off strategy. This grants many of the employees twenty per cent of the working week to invest in their own interests. Encouraging employees to pursue personal interests and passions, builds on their innovative nature and has been a successful incubator for many new ideas. If you give people freedom, they will amaze you. Google leaders work for their teams - their goal is to make managers resources not bosses!. There appears to be a strong sense of team rather than self at Google, which enhances the creative ability of employee as they are encouraged to constantly network with diverse groups of people. They strategize and knock down barriers, setting an example as drivers of innovation. Google is not a conventional company. We do not intend to become one. Throughout Googles evolution as a privately held company, we have managed Google differently. We have also emphasized an atmosphere of creativity and challenge. The open and dynamic organizational culture at Google appeals to employees and this is reflected in the high quality work produced. This facilitates a mutually beneficially relationship between employees and the corporation, and has collectively driven them towards their enormous global success of becoming a $200 billion company.

Upon winning this award Embraers President, Dilma Rousseff, said, There must be an umbilical link between education, academic and research institutes, and the private sector because life depends on innovation. Knowledge, technology and applied sciences equal innovation, and productive innovation leads to increasingly sophisticated products. Hence, Embraers award this year. Embraer applies innovation in six dimensions - product, service, process, marketing, entrepreneurship and new business development. In the last six years Embraer invested nearly US $1 billion in research and development. Following Embraers near collapse in the 1990s they introduced an innovative business model of reverse outsourcing which has now become standard within the aviation industry. They have succeeded ever since. The company builds global planes yet remains at the top end of integrating, designing and assembling innovative regional jet planes while outsourcing many components. Reverse outsourcing enables Embraer to obtain the highest quality and cheapest components from all over the world, giving it a definite advantage over its more vertically and horizontally integrated competitors like Bombardier. We have a more flexible model. All our subassembly is done outside. Bombardier does it in-house. When we want to speed up we flow more activities out while Bombardiers subassembly holds up final assembly and becomes the driver of the cycle. With our supply chain and assembly processes it is very easy to build up the production rate. We need to make only minor investments to speed things up. Embraers CEO Frederico Curado. The outsourcing model gives Embraer strategic alliances with component providers which keep it at the forefront of technology, speeds up the development phase, and keeps costs at a minimum. It is clear that innovation has pushed Embraer ahead of rival Bombardier of Canada and set the stage for present and future success.

The practical expression of Toyotas customer-oriented philosophy is known as the Toyota Production System (TPS). The foundations of TPS are built on standardisation, to ensure a safe method of operation and a consistent approach to quality. The processes at the heart of TPS are: KAIZEN A process of continuous improvement applied daily in every sphere of the companys activities. It is continual striving for improvement of standard processes and procedures, from the most basic manufacturing process to serving the customer, the wider community, and beyond. Just In Time (JIT) The just in time approach to production pioneered by Toyota has now gained almost universal acceptance in world manufacturing. Essentially, just in time manufacturing allows the entire production process to be regulated by the laws of supply and demand. Customer demand stimulates the production of a vehicle. In turn the production of the vehicle stimulates production and delivery of the necessary parts and so on. This innovative process ensures the elimination of waste and maximised efficiency as the right parts and materials are produced and provided in the exact amounts needed. JIDOKA Incorporates quality checks into every step of the production process. By ensuring transparency in all processes, jidoka helps address any abnormalities immediately.

http://www.kpmg. com/global/en/ issuesandinsights/ articlespublications/technologyinnovation-survey/ pages/apple-stillahead.aspx

Toyota has successfully revolutionised its production process by applying these concepts innovatively and effectively. The result has been the provision of high quality vehicles, at lowest possible cost in a timely manner with the shortest possible lead times. The TPS has driven Toyota towards long-term success by becoming the eleventh-largest company in the world by revenue and reporting the manufacture of its 200-millionth vehicle in July 2012. Jul - Dec 2012 TE DIGEST 31

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Driving Manufacturing & Export Competitiveness Through an Innovation Focus

By Anushka Wijesinha

mbraer, Acer, and Hyundai are some of todays top global export brands. What do they have in common? Firstly, they emerged on the world stage because of their focus on innovation, often supported by smart government policy. Secondly, none of them are traditional western brands, and they broke through markets previously dominated by the industrialized world. With technological transformations continuing at a rapid pace, and the emergence of a globalised marketplace, firms in all countries are under pressure to become more innovative. Innovation is becoming the determinant of faster and sustained export growth. Emerging economies in particular have been able to leapfrog by embracing innovation. With the end of the armed conflict, Sri Lanka too is hoping to leapfrog and position itself as a dynamic global hub. As stated in the Sri Lanka: Emerging Wonder of Asia document1, Sri Lankas successful integration with the global economy and its sustained success in international competition will depend increasingly on effective combinations of science, technology and innovation (p.126). This article looks at what innovation is all about and some policy priorities for Sri Lanka. There is a wide body of literature that demonstrates the role of innovation in economic development. For instance, the report Innovation and Economic Growth by Goldman Sachs (2011) shows a clear statistical link between innovation and gains in the standard of living. Fostering

innovation cannot simply be measured in terms of university degrees and patents awarded. Rather, the national goal should be to use the basic research and creativity inherent in our nations people and to translate these into innovative products and services through development and commercialization initiatives. Andrew Grove, the former Chairman of Intel, and Eric Schmidt, Executive Chairman of Google, encouraged the need for translational innovation. It is this type of approach that will enhance returns to investment, boost economic growth and help create productive, well-paying jobs. Innovation is as relevant in the developing part of the world as elsewhere. Innovation was earlier seen as an activity to be carried out by highly educated labour in R&D intensive companies that have strong links to leading centres of excellence in the scientific world. From this view point, innovation appears to be typically a first world activity. But, this view is flawed. Innovation the effort to transform ideas into new and improved products or processes - is an aspect applicable to economies at all levels of development.

Figure 1:
South Korea Philippines Singapore Malaysia China Thailand Indonesia India Pakistan Sri Lanka 0 10

Sri Lankas Challenge Given that innovation is widely considered a primary source of economic growth, policies to facilitate firm-level innovation are high on the agenda in most countries. Sri Lanka too needs to focus on innovation to achieve national economic prosperity and an improved quality of life. A countryshigh-tech exports are a significant measure of a countrys ability to innovate and commercialize scientific findings effectively2. In Sri Lanka, the value of high-tech exports has drastically declined in High-Tech Exports Share recent years. The share of in Total Manufactured Exhigh-tech exports out of the ports: Sri Lanka in Global total manufactured exports Comparison (2010) which just 2.2% in 2001 fell to 1% by 2010. While Sri 20 30 40 50 60 70 80 Lanka recorded an average Source: World Bank Database, http://data.worldbank.org/. 1.8% of high-tech exports
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share each year in the last decade, Korea recorded 75%, Thailand 27%, and Singapore and Malaysia over 50%3. Sri Lankas performance was poorer even when compared to countries in the region like Pakistan and India (see Figure 1). Sri Lankas weak innovation inputs could be a leading cause of this. For example Sri Lankas Gross Expenditure on R&D (GERD) as a proportion of GDP was just 0.11 percent in 2008 a drop from 0.21% in 2004.4 The number of R&D scientists has also decreased from 4,062 in 2004 to 4,037 by 2008.5 Meanwhile, the expenditure on R&D by the private sector, out of total R&D expenditure, is remarkably low. Unlike in most developed countries where much of the R&D expenditure is by the private sector (over 65% in most cases), in Sri Lanka it is a mere 18%. The bulk of R&D expenditure in Sri Lanka is by the state sector (57%). This has strong implications on the rate of commercialization of science and technology research. Yet, innovation is distinct from just research and it doesnt autonomously result from it. The nexus of industry-research collaborations, appropriate financing options, and support for commercialization are vital drivers to move research to innovation. Unlike in most developed countries, many universities in developing countries like Sri Lanka have not established sufficiently strong linkages with industry. Industry obtains access to university laboratories, talents research scientists and a pool of potential recruits. Universities receive industrys financial support, necessary to conduct their work and expand their resources, and they also receive feedback from industry to adapt research to the needs of the economy. The Five Year Strategy of the Ministry of Technology and Research observes that,at present very few knowledge intensive companies and very little R&D that is required for innovation, is taking place in the private sector. On the other hand, most of the R&D undertaken by Sri Lankan scientists end up as mere publications in scientific journals with very few research outputs yielding a commercial product or a process (p. 31). Very few noteworthy examples of

industry-research linkages exist in Sri Lanka today. The most prominent one is the Sri Lanka Nanotechnology Center (SLINTEC). In its first full year of operations alone, SLINTEC was able to secure 5 international patents on nanotechnology products. This is impressive when compared with Sri Lankas historic average of 1.8 total international patents per year6. Similar industry-research partnerships in areas aside from nanotechnology need to be cultivated, drawing lessons from SLINTECs business model. Meanwhile, building a qualified pool of individuals geared towards S&T and R&D will be critical to Sri Lankas innovation ambitions. Education especially science education at all levels is important not only for increasing general science and technology literacy, but also to build up a critical mass of scientists, researchers and engineers. Yet, very few students are engaged in science and engineering courses at Sri Lankan universities7. Compared to a distinct knowledge-led economy like Singapore, where the majority enrolment is in engineering sciences of nearly 30%, in Sri Lanka the majority enrolment is in Arts of over 30%. This is a direct reflection of the fact that only 10 percent of all secondary schools in the country have the facilities to teach science stream at the A/L (Grades 12-13)8. This naturally restricts the number of students who are able to gain admission to science and engineering programmes in university. Eventually this leads to the low numbers of qualified-professionals - Sri Lanka records only 237 researchers per million people, well below the developing country average of 3749. Additionally, R&D is now very much a global activity spurred by international knowledge networks. Globalization and the proliferation of online knowledge have resulted in the market for ideas becoming a global one. As such, firms are now increasingly looking abroad to find new ideas and individuals who can drive their firms forward. This has led to a dramatic increase in international research and development networks to tap in to the diversity of knowledge available across borders. Studies by Kerr and Lincoln (2010) and Hunt and Gauthier-Loiselle (2008) show the high potential for knowledge spillovers and increased innovative productivity associated with knowledge flows from abroad. Sri Lanka can benefit from such knowledge spillovers by entering into technology transfer partnerships with countries leading on innovation. Government policy also has a role to play in incentivizing innovation at the

firm-level. In fact, Budget 2012 was a watershed moment in this regard. In Budget 2012, a range of tax incentives were announced, including: reduction of income tax on research income from 24% to 16%; reduction in personal income tax of all those engaged in research and technology from 24% to 16%; reduction in income tax on all institutions engaged in research and technology to 20% and such institutions are exempt from Value Added Tax (VAT); triple deduction in relation to research and development expenditure undertaken by enterprises through Government institutions, to promote private institutions to use Government research facilities; and so on. These measures have been commended by private sector groups10. However, interviews with leading industrialists reveal that several issues may constrain these incentives: (1) the small number of suitable Government research institutions capable of catering to industry needs (the ITI was the only one mentioned by those interviewed); and (2) the limited capacity in, and low-industry orientation of, Government research facilities. However, this is a vicious cycle and needs to be broken. Government research institutions cannot develop greater industry-orientation without kick-starting this process. Meanwhile, Sri Lankas private sector needs to be given confidence in the abilities of Government research institutions, and for this their financial and human resource capacities need to be expanded. Policy Priorities Fostering a forward-looking innovation system, that supports knowledge-interaction among various parties, and commercialization, is critical, if Sri Lanka is to enhance manufacturing competitiveness and produce higher value exports. Sri Lankas weak performance on innovation is a symptom of the low priority given to S&T and R&D investment over the past several years. This may be largely attributed to the distraction of fighting a war. In post-war Sri Lanka, reversing this it will be a key determinant of our competitiveness and rapid export growth. A key point that needs emphasizing is that innovation is beyond just research. Innovations come from the entrepreneurs who make them happen and ultimately depend on a societys responsiveness and ability to transform research into higher exports, into things that add value to peoples lives and to the economy. Encouraging these entrepreneurs with appropriate policy support for techno-entrepreneurship is important, for example by setting

a conducive business environment, better access to finance through venture capital, incentivizing commercialization of inventions, etc. For successful innovation policy to kick-in, it will need the firm backing of top leaders, to lend credibility to the vision and facilitate the adoption of key measures for removing bureaucratic hurdles. It is time that Sri Lanka set up a powerful National Innovation Council chaired by H.E. the President or Prime Minister which can drive the innovation policy agenda at a national, strategic-level. Meanwhile, rewarding and recognizing innovations is important. In an environment where there are award schemes for nearly everything in Sri Lanka, it is high time that a Presidential National Innovation Awards scheme is introduced to promote and recognize successful innovations, particularly those that have resulted from industry-research collaborations. Emerging economies that were poorer performers than Sri Lanka only a few decades ago are moving forward at a rapid pace. South Koreas Hyundai and Kia manufacture the most fuel-efficient cars in the world today. Brazils Embraer is one of the leading jet manufacturers and has partnerships with the market leaders, Boeing and Airbus. Taiwans Acer and Asus are now two of the leading notebook manufacturers in the world. Innovation was at the heart of propelling these firms, and their countries, into the global spotlight. So, focusing on innovation must be a key policy priority in the coming decades. Only then can Sri Lanka boost its higher value exports and leap into the same league as these dynamic emerging economies.
Endnotes 1 Ministry of Finance and Planning (2010) 2 products with high R&D intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery 3 Ministry of Technology and Research (2010) 4 National Science Foundation (2008) 5 Ibid. 6 Ibid 7 This is of course, aside from the broader challenge of expanding tertiary education in Sri Lanka, where at present of more than 1000,000 deserving students only around 15 percent who gain the necessary A/L qualification are able to enter into university (Source: IPS, 2011). 8 IPS (2011) 9 World Bank (2008) 10 National Chamber commends the 2012 Budget proposals, Island, November 22, 2011 http:// www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=39577 [accessed on 1 May 2012].

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Towards More Science, Research and

Innovation in Sri Lanka

Veranja Karunaratne, Gehan Amaratunga and Harin De Silva Wijeratne
Sri Lanka Institute of Nanotechnology

An axiom generally agreed upon worldwide is that research and innovation leads to the prosperity and an improved quality of life of a nation. In Sri Lanka, this state of prosperity can only be achieved by increasing scientific output i.e., research publications and patents, leading to commercialization. Such an effort must be supported by initiatives aimed at an expanding research capacity. However, Sri Lankas road to economic prosperity appears to be challenging.
Funding ____________________________________ Only about 0.15% of Gross Domestic Product (GDP) was spent on research and development in Sri Lanka last year which, in comparison to the average of about 1% contributed by most developing countries and over 2% allocated by developed nations, is an insignificant amount. Sri Lanka has a record of less than two patents filed at the USPTO compared to thousands filed by developed nations. Such a low number of patent applications clearly correlate with the low expenditure on research and development. Thus, up to now, research has played a minimal role in Sri Lankas development. Owing to this fact, since gaining independence in 1948, the Sri Lankan economy has not been able to venture out of its commodity driven mindset. Further, of all our exports only 1.5 % arise out of advanced technology products. It is also noteworthy that Sri Lanka has not taken an active role in any of the technological waves that has swept the planet for the past two centuries. In this backdrop, it is pertinent to ask how nanotechnology, considered as the fifth industrial revolution, can contribute to the enhancement of the Sri Lankan economy. Firstly, the state should provide a planned mechanism to reach a satisfactory level of funding for R&D by increasing the contribution from the current rate of 0.15 % of GDP. For example, the Government budget allocation for research should increase up to at least 0.5% of GDP in the next five years. Since state funds are not continuously available in sufficient
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Human resources ____________________________________ The essential need for human resources in research and development is never in doubt. In Sri Lanka, the number of practicing scientists are currently lower than 5000. For it to make an impact on R & D, this number must increase by at least four fold. Post graduate training abroad was the norm followed in the past. However, it is critical to develop local training for post graduate students to engage in high quality research. A system of recognition and support for scientists who will undertake the task of encouraging and supervising students to pursue Ph.D. degrees should be incorporated. Institutions ____________________________________ The research environment consists of both work systems and available facilities. Brain drain has not occurred due to a search for better salaries alone, but also due to a search for better R&D facilities available elsewhere. It is important to develop R&D clusters by bringing research institutes and universities into working arrangements as well as developing research triangles and quadrangles for different physical locations. There are 37 research institutes and 14 state sector universities across the island with significant capacities which have not been adequately developed or made use of. Clustering is a strategy to derive synergy, e.g., Western research cluster one - UOM, UOC, USJPura with ITI, IDB, RRI and AEA; Cluster two - UOK, NARA, NERD and CRI; Central Research Cluster - UOP, IFS, VRI, PGRC and TRI. Regional clusters should be supported with state-of-the-art facility developments preferably by having science / techno parks established initially with one per region. It is also important that all research institutes fall within one ministry alone. All research personnel should have similar career pathways and assessment and reward schemes to ensure focus. Universities should consider moving out of the undergraduate emphasis and shift towards becoming research universities. This could initially start with a few selected universities. Procedures ____________________________________ The regulatory environment applicable to research and development needs to be streamlined. Despite having limited funds, there appears to be many procedural and system obstacles. The importance of research and its special characteristics need to be recognized and maximum support should be extended within an accountability framework. On the one hand, procedures should address financial, leave, promotions and reward mechanisms, while another set of procedures should address relevant safety issues as with biosafety, chemical safety and occupational health and safety of new materials research (ie., nanomaterials, bioimplants, GMOs). While simplifying procedures, the researchers themselves should join in to support an ethical code of conduct which will go a long way in resolving conflicts and establishing credibility. Quality assurance should be a basic necessary procedure applicable to all research activities. Globally, benchmarking exercises are implemented to assess performance of individual nations, institutions and programs. National benchmarking mechanisms are also necessary in chartering progress as well as developing additional linkages. The alignment of a national benchmarking strategy will also support linkage to regional as well as to global platforms. Protection ____________________________________ Researchers have an obligation to disseminate new knowledge generated within their research activities by publishing research output. However, innovations which possess potential for commercialization must be protected. An innovation ecosystem must be created with mechanisms for developing patent writers, legal personnel with scientific and legal skills etc. The public sector research and development institutions, universities and other similar institutions and agencies should create policies to facilitate the following: An environment conducive for, and to provide incentives for, R & D activities, and other knowledge creation activ-

amounts to satisfy the R&D demand, innovative mechanisms must be sought. Examples of such mechanisms are: funding

a) Developing private-public partnerships for R&D b) CESS schemes for targeted research with optimal use of funds c) Venture Capital d) Tax concessions on R&D spending e) Attracting foreign funds as an outsourced destination for research All these policies are designed to encourage entrepreneurial researchers to commercialize innovation via startup companies. At present, venture capital, either from the state or the private sector is not available in Sri Lanka. While it is conceivable that such support cannot be engendered overnight, Sri Lanka must develop policies to direct innovators towards this. What is also crucial in addition to venture capital funding (which normally undertakes innovations which are at least at the intermediate level of development), are seed funds which are of a smaller nature. They are essential in supporting research for commercially promising innovations. Many research projects carried out at Universities and Research Institutions perish at this death valley of research. Seed or angel funding to raise research toward gifted innovations must be encouraged and the states support will be critical in this pursuit.

ities towards commercialization of new knowledge. Setting up operational units such as technology management units, commercial arms, knowledge exploitation units to promote spin off enterprises such as R&D based joint ventures with the private sector. Through these operational units, the universities and research institutes should promote processes related to business incubation and start-up companies. Providing funding mechanisms for the institutions to support IP creation. Inducing the private sector to conduct contract /collaborative research. Development of incentive systems to promote partnerships. Effective transfer of IP rights. Ensuring the effective management of IP rights.

Accepting that IP generation and protection are critical to the development of Sri Lanka is of paramount importance. Alignment of policy, paired with adequate state support in an effort to make this a reality, would take Sri Lanka out of its commodity-selling mindset and usher in a smarter nation.
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Image by: Anushka Wijesinha

Guest Article

States Role in Boosting Nanotechnology

by Shalini Dharmawardena
Senior Economist (Economic Research Department) - Central Bank of Sri Lanka

The National Nanotechnology Initiative (NNI) implemented by the government can be viewed as a technological milestone for Sri Lanka. Given past failures in grasping the full potential of the technological waves of Information Communication Technology (ICT) and electronics, the timely exploitation of nanotechnology is commendable. Learning by examples of the Asian Tiger economies (i.e., Hong Kong, South Korea, Taiwan, Singapore, etc.,) that moved from poverty to prosperity with the adoption of technological advancements in their development agenda, Sri Lanka has acted wisely in this undertaking. The much needed quick wins has been reached and SLINTEC boasts of seven international patents to date. The nanotech park is also becoming a reality and has begun development of its first phase by laying the foundation stone of the Nanotechnology Centre of Excellence (NCE). Aside from these successes, given that investment in technology is a partial public good due to its unique traits of non-rival consumption and non-excludability, the many socio-economic benefits
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of investment in technology and research as well as the high initial costs calls for the state to intervene further in this venture. Nevertheless, it can be argued that nanotechnology does possess features of a partial public good, which are particularly apparent when the patent period of an invention expires. This is the reality as the consumption of an invention cannot be constrained to the inventor and his/her immediate society alone, but will extend to the society at large. A fitting example of the features of non-rivalry and non-excludability in nanotechnology is the invention of a cure for cancer at a nominal cost through nano research, which will not only benefit the individual researcher, healthcare company, and cancer patients of that country, but will also be an asset to society at large beyond national borders. Once the patent rights eventually expire, other health care companies will make use of past research and will consume its benefits without paying the cost. This explains its nature of being a partial public good and the many socio-economic benefits it carries. Research and Development lacks a

clear and certain outcome and is not timebound. Contrary to this, entrepreneurs are profit-oriented and have time-bound goals and targets. Hence, a mismatch between technology-oriented research activity and application-oriented businessmen is evident. Even though in most developed economies the percentage of private sector investments in technological research outweighs the state sector, the common perception in the developing world is that the state sector should invest in research and development, while the private sector focuses on less risky investments. Sri Lanka belonging to the latter classification necessitates that the state sector intervenes in the development of nanotechnology which is still at an infant stage; as has been done by Asian Tiger economies at the outset of harnessing technology in their development agenda. The main problems faced by these economies were the apparent lack of a clear mechanism linking research with market forces, the lack of an intellectual property system, and the lack of support services. These problems were addressed in numerous ways by tax incentives, lump

sum allocations, and the formation of a Technology Development Fund, awarding research grants, and developing the venture capital market. The initial steps taken by the Sri Lankan government to form the Technology Development Fund with the assistance of the Malaysian Technology Development Corporation provided some hope in this direction. Such a fund would ideally finance commercialization of prioritized research, provision of research infrastructure and incubator facilities, and the acquisition of new technologies, etc., and should be duly utilized by the NNI. This fund can also be used to liaise with other international science parks, provide research grants to Multi National Corporations (MNCs), cluster development, incentivize man power training, and build Public Private Partnerships (PPPs). In the longer term, the state can make further lump sum allocations to address the various ancillary and support fields which are essential for achieving sustainable long term growth in nanotechnology research and development. The funds can be directed towards ensuring the minimization of environmental and social costs of this technology, through the provision of recourse to affected sectors. For instance, given the invention of nano fabrics and nano paints which may have a detrimental impact on laundries and cleaners, an alternative source of employment for this segment of the workforce has to open to avoid unemployment problems. Similarly, the invention of certain nano products may have environmental and health implications. The use of a well thought out quality standard procedure will be necessary to market products that are not socially or environmentally harmful. Obtaining certifications from ISO and SLS will be instrumental in this. In order to ensure sustainable (i.e., socially, environmentally and economically harmless) nanotechnology applications, a robust mechanism committed to this task needs to be implemented and funds should be allocated accordingly. Additionally, funds can also be directed towards building a human capital base. SLINTEC has plans to create an environment which attracts expatriate scientists to the country. Further, the necessity to establish a platform of scientists and technical staff over a short period of time requires local and foreign training, industrial internships, a Presidential award system, etc. Funds can also be committed towards disseminating knowledge among school children and university

students on this novel technology, while the gradual inclusion of nanotechnology to the school curriculum is also essential. However, the key to acquiring the necessary resources do not lie in new policies and over involvement of the state alone, but the astute utilization of opportunities within the existing frameworks. For instance, tax incentives offered for research and development has increased substantially over the past three years and the Board of Investment (BOI) grants special tax holidays and other incentives to ventures that are of strategic development importance to the nation. Machinery and lab equipment used for research and development are exempted from import taxes. Similarly, the 2013 Budget has allocated Rs. 9 billion for direct expenditure on research and related work done by researchers in government research institutions. Such budgetary provisions which encompass the entire domain of research and development should be duly utilized by the nanotechnology venture, which has been enunciated as the priority sector in the five year strategic plan of the Ministry of Technology and Research.

In order to ensure sustainable (i.e., socially, environmentally and economically harmless) nanotechnology applications, a robust mechanism committed to this task needs to be implemented and funds should be allocated accordingly.

Furthermore, an environment conducive to attracting venture capital funding is of utmost importance to provide finances for startup companies which will undertake the commercialization of research. The initial funds needed to acquire patent rights, legal costs and expenditure on lab equipment should be easily accessible despite the high risk nature of these projects. The high initial cost involved in nanotech research is justifiable, owing to the potential exponential returns through research and development. Jack Uldrich in his book The Next Big Thing is Really Small illustrates this through

the example of a pond filled with lilies. He explains that if the amount of lilies in the pond double every day and takes thirty days to fully cover the pond it will be only half covered at day twenty nine. However, for it to be fully covered it will take just one day. The return of technology and research can be likened unto this metaphor where, long periods of labored experiments with precede before a clear outcome. Nevertheless, once the outcome is evident the returns will be immense. That being said, in order for funds to flow to such high risk projects an economy should possess a strong venture capital network. In a country where venture capital funds and angel funds are rarely spoken of, this task seems impossible without the intervention of the state. Despite this predicament, it is imperative to bear in mind that it is primarily the market forces supported by the state sector that should be the focus. The cooperation of the banking sector is necessary as no state body can fully fund all technological projects of a country. The most the state can do to encourage the flow of funds to these high risk investments is to provide guarantees, refinancing facilities, and concessionary interest rates through various state bodies. Therefore, the banking sector must be willing to pass the ultimate benefit to the borrower, charging reasonable interest rates, prioritizing the allocation of funds, and emerging out of its risk averseness. As a final thought, the importance of commitment and coherence of policy decision makers in making this endeavour a success cannot be over emphasized. The industrial thrust, budgetary allocations, commitment of financial institutions, education policy, and private sector enthusiasm will be the key success factors in achieving a competitive edge in the international arena. Slower than anticipated progress of developing the nanoscience park can be detrimental to the country due to a potential loss of market leadership and the competitive advantage of investments. In order to avoid such an unfavourable outcome, there has to be a collaborative effort among all parties. Such will be possible when state allocated funds, private sector participation, expatriate scientists contribution, and the financial sector involvement strive to synergise the overall efforts.
(The views, opinions and recommendations in this article are solely those of the authors and should not be interpreted as the views of the authors employer. The author is a member of the National Nanotechnology Committee of the National Science Foundation.)

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Our Take
Economists have increasingly placed emphasis on the role that good social capital can have in generating and nurturing good ideas and bringing them to fruition. Plenty of recent research of the most dynamic and innovative entrepreneurs point to the value of being connected to diverse social networks links to people from wholly different socio-economic backgrounds. In Sri Lanka we have the good fortune of not having to look very far in search of a diverse network of people. Given our multi-ethnic community, we have a diverse network base here at home. Sri Lankas people can make optimal use of the

The editorial team discusses why three things that are sometimes seen as challenges in Sri Lanka could in fact be opportunities for innovation, if harnessed cleverly.

Private-Public Partnership for Innovation

Ethnic and Cultural Diversity Can Foster Creativity many positive spill-overs from diversity. We must not underestimate the true gains of our diverse community and ignore the dynamic benefits it brings, notably a boost in competition, innovation and enterprise, raising long term productivity growth and hence standards of living. Sri Lanka needs to do more to harness diversity, by recognizing the scale and potential economic and social value of diverse cultures. Philippe Legrain, the prominent economist and the author of Open World: the Truth about Globalisation and Immigrants: Your Country Needs Them, writes that people from different cultures come up with more innovative results to problem solving and entrepreneurship than if all have the same background. Further, Legrain observes that, Diversity acts as a magnet for attracting creative, talented people. Diverse societies are generally more entrepreneurial because they are more open and tolerant. Following the end of a 26 year civil war, Sri Lanka should embrace a tradition of openness and cultural diversity and learn to treat diversity as an asset rather than a cost. Can our nation can draw on the widest possible pool of talent in order to foster innovation and propel growth.

Case of SLINTEC
The Sri Lanka Institute of Nanotechnology (SLINTEC), which started research in August of 2009, provides a platform for research solutions based on nanotechnology to Sri Lankan industries. The participating industries namely, Brandix, Dialog, Hayleys, Loadstar, and MAS Holdings, who are also the joint venture partners, have established niche markets for their globally competitive products and are national leaders in terms of export revenue in their respective sectors. It is envisaged that these companies would benefit from nanotechnology differentiators provided by SLINTEC to their product line up. Significantly, SLINTEC has applied for three patents at the USPTO to cover the innovations for its joint venture partners. Specifically, two of the patents cover a slow release nano-fertilizer formulation developed by SLINTEC which releases nitrogen to the soil in a slow and sustained manner. The loss of nitrogen (up to 50 %) due to evaporation and leaching out by rain water is a major economic loss to the agriculture sector. In Sri Lanka, the current fertilizer subsidy allocation by the government in the paddy and tea sector is Rs.30 billion. Even if the slow release nano-fertilizer formulations saves merely 30 % of the current loss, Sri Lanka would still save an amount of Rs.9 billion. The third patent application is on an environmentally friendly, value-added, solid rubber tyre based on nano-materials. SLINTECs proposed 50 acre nanotechnology park in Homagama Another key area SLINTEC continues to pursue since inception is adding value to Sri Lankan natural resources with nano-applications. SLINTEC has applied for two patent applications in this area. Firstly; to make carbon nano-tubes using unique Sri Lankan vein graphite (mined underground only in Sri Lanka) at Bogala and Kahatagaha mines. Secondly for a physical method to make nano-magnetite from naturally occurring magnetite ore found in Matale. Carbon nano-tubes are used to manufacture integrated circuits, semiconductor chips used in computers, and applications in nanoelectronics amounting to a global business of several billion US Dollars. On the other hand, nano-magnetite, among its manifold uses, is an important ingredient in magnetic resonance imaging contrast enhancement, magnetically controlled transport of anti-cancer drugs, and microwave devices. The global market for nano-magnetite is growing and currently 25 g is sold at Rs.19, 000. In addition, SLINTEC has championed the making of Titanium Dioxide from Ilmenite found in Pullmudai in Sri Lanka without exporting the raw sand. Globally Sri Lanka has the 9th largest Ilmenite reserve containing up to 65 % of Titanium Dioxide which ranks 3rd in terms of purity. Sri Lanka exports approximate 80,000 Mt of Ilmenite earning about 8 million US Dollars. The same amount of Ilmenite is converted into Titanium Dioxide by the multinational companies who purchase them for a value of 120 million US dollars. Because Sri Lanka has not invested in technology needed to convert Ilmenite to Titanium Dioxide, the nation loses a significant amount of foreign exchange. In addition to making a strong national case for making Titanium Dioxide from Ilmenite in Sri Lanka, SLINTEC has developed a process for converting Ilmenite to nano-Titanium Dioxide, which in terms of value addition is 1:250. SLINTEC has also turned its attention to is Montmorillonite (MMT) clay or nano-clay. MMT is a little known Smectite clay mineral in Sri Lanka, found in mainland India and in many countries in the region. In Sri Lanka, MMT had been recorded in small amounts in dry zone soils and is believed to be formed as a result of weathering of micaceous minerals such as biotite, phlogophite and muscovite. In the current efforts to locate new mineral deposits with nano-applications, SLINTEC has applied for an exploration permit (with a view to secure mining rights) at the Geological Survey and Mines Bureau for a large MMT deposit. The MMT deposit was found in Murunkan in the Mannar District of the Northern Province, and is the first of its kind in Sri Lanka. Although the global market for MMT currently is only about one billion US dollars, its use in clay polymer nano-composites is growing globally. With the Sri Lankan deposit in Murunkan, estimated to be over 75 million Mt, SLINTEC hopes to provide this resource to the industries where MMT is used as a raw material. The nanotechnology initiative in Sri Lanka launched through the SLINTEC is unique among similar worldwide initiatives, where the government and the private sector have invested equally. The spirit of this initiative, as reinforced in this case study, is to ensure that scientific research findings directly contribute to national development.
This write up was provided by Prof. Veranja Karunaratne, Science Team Leader - SLINTEC Jul - Dec 2012

Heavy Enrolment in Arts and Humanities Can Be a Plus At present the contribution of R&D to GDP growth is negligible. It is also recognized that the need to develop technology and a skilled and motivated S&T community within the country are necessary to overcome this predicament. A major challenge faced by Sri Lanka is that number of students enrolled in science and engineering courses at local universities is very low. Compared to knowledge-led economies such as China and Singapore, that have achieved fast paced growth through an emphasis on S&T, with nearly 30 per cent of enrolment in science and engineering courses, Sri Lanka lags significantly behind. For Sri Lanka to put itself on to the world technology map through an improvement in the number of student enrolments in the above mentioned fields will be long and challenging process.The fact that over 30 per cent of enrolments in Sri Lanka are in Arts courses has been accepted as being a disadvantage or a handicap to innovation. But, what if we were to view this scenario in a different, broader perspective - is it not possible to see that this so-called handicap could in-fact work in our favour to foster innovation in Sri Lanka? Arts and humanities courses foster a great deal of creativity in those enrolled in the field. The creativity cultivated in these courses will be engrained in 30 per cent of our nations university-educated young people each year a significant part of the work force. This can be a valuable tool for innovation, as creativity is a key part of the innovation process. Couldnt this creativity and openness be harnessed to contribute to inventions of products, processes and procedures? Could Sri Lanka not embrace the arts and humanities talent pool by recognizing that it may actually be a gateway for creativity rather than being a handicap to innovation?

Process Innovation Can Drive Manufacturing Competitiveness It is accepted that developing countries such as Sri Lanka are destinations for outsourcing and FDI by entrepreneurs in other, particularly advanced, economies. Such international outsourcing lowers the marginal cost of production for multinational Corporations (MNCs) allowing them to compete in increasingly competitive global markets. Being a nation that receives a significant amount of outsourcing, Sri Lanka should strive to innovate on processes and procedures in manufacturing in order to reap the benefits that offshoring may offer. Given cheap labour and input costs in countries such as Bangladesh and Vietnam, Sri Lanka has lost its labour-cost advantage in manufacturing. However, this need not be a hindrance to our efforts in attracting MNCs. Sri Lanka must focus on providing high quality products with an emphasis on productivity and innovation, in order to maintain its attractiveness as an appropriate location for outsourcing. To benefit from this, Sri Lanka must broaden their domestic knowledge base and generate specialist capabilities. The initiation of appropriate firm-level policy that provides incentives for innovation as well as the necessary infrastructure, support services and human resources are necessary. Sri Lanka can engage in process innovation, which can result from formal and informal investment in R&D and on-the-job learning. Such technological advancements raise total factor productivity which is an instigator of economic growth. MAS Holdings, an innovation focused company in Sri Lanka, is the regions largest supplier of intimate apparel and sports/active wear. Working in partnership with global brands such as Victorias Secret, Speedo, Marks & Spencer, and NIKE, Inc., MAS invests in innovative processes to build on efficiency and high quality production so as to differentiate itself from its low-cost contenders in China, Bangladesh etc. Could the loss of the cost advantage in manufacturing be transformed into an opportunity and encouragement to continuously improve the organization of production by means of investing in innovation, R&D and human resource development?

Do you agree with Our Take? Have an opinion youd like to share? Write to us at talkingeconomics@ips.lk
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Fresh View
Entrepreneurship isnt easy, but people will nurture you and help you grow
Lahiru Pathmalal
CEO, Takas.lk

The Editor spoke with four young leaders in Sri Lankas technology landscape on their perspectives of innovation, creativity, techno-entrepreneurship, and the challenges facing Sri Lanka in driving innovation. To watch the full interviews, simply scan the QR codes with your smartphone or tablet and youll be taken directly to the videos on the IPS Youtube channel. Lahiru Pathmalal, CEO of Sri Lankas latest e-commerce start-up, says that his family context, external mentorships and partnerships, and the emerging venture capital arena in Colombo helped him take the plunge from a job in a think tank to becoming a techentrepreneur. Takas.lk won seed funding through a local competition called Venture Engine which invests in tech start-ups. While seed funding is usually quite small, Lahiru says that its more about who you raise funds from than how much you raise. Takass impressive investor list includes Rajan Anandan (Chairman, Blue Ocean Ventures and Head of Google India), the Indian Angel Network, and a private venture capitalist from Australia. What excites him about entrepreneurship, he says, is that the sky is the limit.

EXPERT VOICES
PANEL DISCUSSION ON

TALKING ECONOMICS

THE JOBS CHALLENGE

Sri Lankans need to get back to building things

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Kalinga is the founder of TechKatha an online platform that helps democratize the ICT information flow by breaking down technology concepts and address practical issues through free-to-download videos and podcasts. In this interview, Kalinga talks about the importance of taking technology beyond the confines of Colombo. Tech Katha was awarded the e-Swabhimani award by the ICTA in 2009 for its pioneering efforts. He has now turned to a more hardware-oriented approach to taking technology to the masses having built a micro-controller PCB which young people can buy for just Rs 1,600 and learn to make simple meaningful electronic devices. This, he says, has generated huge interest among budding coders and programmers from across Sri Lanka, especially in rural areas which have limited access to technology.

Kalinga Athulathmudali

Founder, TechKatha

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Instead of always being a follower, we must create something new that others will follow

Sri Lanka Country Consultant, Google Asia-Pacific

Rohan Jayaweera

Rohan Jayaweera talks about what it really means to be innovative as a company or as a society and gives some interesting food for thought on what it will take to drive innovation in Sri Lanka if the country is to really stand out. Allowing peoples ideas to flourish and challenging traditional and cultural norms, Rohan says, is essential to building a more innovative nation. We are so good at following than creating. That needs to change. Thats a transition that I would like to see Sri Lanka make, he says.

IPS Talking Economics hosted a unique networking event and Expert Voices panel discussion on The Jobs Challenge on Wednesday 22nd August from 6 to 8pm in the IPS Executive Lounge. The panelists, drawn from diverse sectors included Kishu Gomes (Managing Director/CEO, Chevron Lubricants Lanka PLC ), Prajeeth Balasubramanium (Founder and Managing Director, Blue Ocean Ventures),Nisha Arunatilake (Research Fellow and Head, Human Resources Development Policy Unit, IPS), Rashitha Delapola (International Affairs Coordinator, National Youth Services Council), Gayan Panditharathna (young entrepreneur). Anushka Wijesinha, Research Economist and Editor of the Talking Economics Blog was the Moderator at the discussion.

The audience was an eclectic mix of young professionals from the private sector, academia and public institutions. Sri Lanka continues to grapple with issues of youth unemployment and under employment, and this Expert Voices open dialogue provided an opportunity to explore some of the challenges and dilemmas of this issue, but also identify innovative solutions. The latest issue of the bi-annual publication Talking Economics Digest (January June 2012) was also launched at this event, with the first copy being handed by IPS Executive Director Saman Kelegama to Patrick Amerasinghe, respected private sector leader and founder/chairman of Young Entrepreneurs of Sri Lanka (YESL).

Latest Publications
Hiran Wickramasinghe
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Group Managing Director, Informatics Holdings

People must have access to more technology

40 TE DIGEST Jul - Dec 2012

Hiran Wickramasinghe talks about the untapped potential for innovation in Sri Lanka and the creative and technology talent that he's seeing emerging out of training institute's like his, the Informatics Institute of Technology (IIT). Hiran gives an example of one such creation, the 'Gaming Glove', created by students at IIT. He says that Sri Lankans need more access to technology but also certain attitudes need to change at the society- and company-level so that new ideas are embraced and people feel like innovation is encouraged.

Fostering Innovation to Fast-forward Growth in Sri Lanka Anushka Wijesinha and Nethmini Perera Research Studies: Working Paper Series No.16, December 2012 A new Working Paper by IPS looks at the imperative of innovation for Sri Lankas growth and competitiveness in this new post-war era. With technological transformations continuing at a rapid pace, and the emergence of a globalised market-place, all countries are under pressure to become more innovative. The paper explores the status of R&D investment, availability of a skilled talent pool, need for industry-research collaboration, importance of commercialization and innovative financing, attracting diaspora scientists, among other issues. The paper calls for innovation policy to be considered in a holistic manner, and calls for a powerful National Innovation Council to be set up to drive the agenda at a national, strategic level.

LATEST PUBLICATIONS

Jul - Dec 2012

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IPS
International Conference on Value Chains for Inclusive Development Lessons and Policies for South Asia Dr. Saman Kelegama, Executive Director, IPS, Sunimalee Madurawala, Research Officer, IPS and Ashani Abayasekara, Research Assistant, IPS participated as resource persons at an International Conference on Value Chains for Inclusive Development: Lessons and Policies for South Asia, jointly organized by the Institute for Human Development, New Delhi and Capturing the Gains Research Network, University of Manchester, in association with UN-ESCAP, South and South-West Asia Office, New Delhi, Centre for Globalization, Governance and Competitiveness, Duke University, Centre for Policy Dialogue, Bangladesh and CARE-International, Bangladesh, held in Dhaka on the 24th and 25th of November, 2012

17th Joint Committee Meeting of Business Cooperation Committees to mark the

60th Anniversary of Japan-Sri Lanka Diplomatic Relations

Executive Director of the IPS made a presentation on Japan-Sri Lanka Economic Relations: Trends and Opportunities at the conference to mark the 60th Anniversary of Japan-Sri Lanka Diplomatic Relations took place at the BMICH on 6th December 2012. The conference took place parallel to the 17th Joint Committee Meeting of the Sr i Lanka-Japan and Japan-Sri Lanka Business Cooperation Committees ADB South Asia Research Department (SARD) Economists Conference The ADB South Asia Research Department (SARD) Economists Conference took place in Kathmandu, Nepal, during 4-5 December 2012. Economists from a number of South Asian countries participated in the Conference. Executive Director of the IPS was a Discussant to a Session on Inflation in South Asia and commented on the country papers on Sri Lanka, Bangladesh, and India

Training Programme on Research Methodology for Department of Manpower and Employment

IPS successfully conducted a four day training programme on Research Methodology for the officers of the Research Division of Department of Manpower and Employment, at the Productivity Secretariat, of the Ministry of Productivity Promotion, Colombo, during 24th to 27th September, 2012. IPS research staff, Wimal Nanayakkara (Course Coordinator), Dr. Parakrama Samaratunge, Dr. Ganga Tilakaratne, Roshini Jayaweera, Dilani Hirimuthugoda and Priyanka Jayawardane, served as Resource Persons.

Sri Lanka Economic Summit 2012 The Sri Lanka Economic Summit 2012, took place at the Cinnamon Grand Hotel during 10 12 July. The summit was organized by the Ceylon Chamber of Commerce. Dr. Nisha Arunatilake, Research Fellow, IPS was one of the keynote speakers at the Skills & Productivity to Compete in the Global Market Plenary Session. Communication Policy Research South 7 Young Scholar Seminar Programme Buddhika Brahmanage, Research Assistant, IPS, won a competitive scholarship to attend the Communication Policy Research South 7 Young Scholar Seminar Programme. This years CPRafrica 2012/CPRsouth7 was held during 3 -7 September, 2012 in Port Louis, Mauritius

International Symposium on Agriculture and Environment 2012

5th South Asia Economic Summit

Dr. Saman Kelegama, Executive Director, IPS, Dr. Dushni Weerakoon, Deputy Director, IPS, and Anushka Wijesinha, Research Economist of IPS were resource persons at the 5th South Asia Economic Summit (SAES), held in Islamabad, Pakistan during 11 - 13 September, 2012. IPS will host the 6th Summit in Colombo from the 2 4 September 2013.

IPS Annual National Conference, How Can Sri Lanka Stay Dilani Hirimuthugodage, Research Ofon the Growth Expressway? ficer, IPS, made a presentation on The TRIPs Agreement in Protecting New Plant Varieties and Farmers Traditional Knowledge in Sri Lanka at the International Symposium on Agriculture and Environment which was held at, and organized by the Faculty of Agriculture of the University of Ruhuna National Policy Dialogue on The Taxation Link in Sri Lankas DevelThe IPS Annual National Conference on the theme How Can Sri opment: Emerging Issues Lanka Stay on the Growth Expressway?, took place at the IPS Auditorium on 7th November 2012. At the National Conference, IPS IPS together with the Partnership for released its flagship report: Sri Lanka State of the Economy 2012. Economic Policy (PEP) organized the The theme for this year is How Can Sri Lanka Stay on the Growth National Policy Dialogue at the IPS ConExpressway? The programme consisted of a full days programme ference Room on 23rd November 2012. with two sessions. Session I was on How Can Sri Lanka Stay on the The Dialogue, was attended by top ofGrowth Expressway?: Bridging Disparities across Sectors, Regions ficials from the Department of Inland and Population Groups, while Session II was on How Can Sri Lanka Revenue and the Central Bank of Sri Stay on the Growth Expressway?: Private Enterprise Growth, For- Lanka, university academics, as well as eign Direct Investment, Innovation, and Competitiveness.. The Chief representatives from civil society orgaGuest at the event was the Hon. Senior Minister for Scientific Affairs, nizations like Transparency International Professor Tissa Vitarana and Plan Sri Lanka. Regional Conference on Strengthening Cooperation between Members of Parliament and the Private Sector in Making Public Private Partnerships More Effective Dr. Malathy Knight, Research Fellow and Head, Industry, Public Enterprise Reform and Regulatory Policy Research was invited to make a Key Note Presentation at a Regional Conference on Strengthening Cooperation between Members of Parliament and the Private Sector in Making Public Private Partnerships More Effective, jointly organized by the Bangladesh Enterprise Institute (BEI) and The Asia Foundation (TAF), in Dhaka on the 20th October, 2012

IMF-World Bank 2012 Annual Meeting

IPS Executive Director was invited as a Discussant for the IMF-World Bank Civil Society Town Hall Meeting of the IMF-World Bank 2012 Annual Meeting in Tokyo, Japan. The IMF Managing Director, Christine Lagarde; The World Bank President, Jim Kim, and Sheela Patel (second Discussant from India) participated at the Forum where the two Discussants posed questions to the Managing Director of the IMF and the President of the World Bank. As an IMF Fellow, the IPS Executive Director posed the questions to the IMF Managing Director at the Forum

Seminar on Trade Facilitation in South Asia: Addressing Barriers to Foster Trade Chain
A seminar on Trade Facilitation in South Asia: Addressing Barriers to Foster Trade Chain, organized by the SAARC Chamber of Commerce and Industry in collaboration with the Federation of Chambers of Commerce and Industry of Sri Lanka and Friedrich Naumann Stiftung, took place at the Taj Samudra Hotel, Colombo on 13th July, 2012. Ashani Abayasekara, Research Assistant, IPS, made a presentation on "Improving Trade Processes and Procedures in Sri Lanka" at this seminar.

Launch of the Sri Lanka Human Development Report 2012

The launch of the Sri Lanka Human Development Report 2012 (UNDP) titled, Bridging Regional Disparities for Human Development, took place on October 5, 2012 at the IPS. Chief Guest at the occassion was Dr. Sarath Amunugama, Deputy Finance Minister. The welcome address was made by Dr. Subinay Nandy, UN Resident Coordinator and UNDP Resident Representative in Sri Lanka and Prof. W. D. Lakshman, Chairman IPS. This years report focuses on issues if disparity and inequality that prevail in the country. IPS undertook extensive research and analysis for the preparation of the report. The authors and key contributors from IPS were, Dr. Nisha Arunatilake (lead author), Mr. Wimal Nanayakkara, Ms. Sunimalee Madurawala, Ms. Priyanka Jayawardena, Ms. Ayodya Galappattige and Mr. Anushka Wijesinha. Jul - Dec 2012 TE DIGEST 43

MIM-CPM International Management Conference

Anushka Wijesinha, Research Economist, IPS, was a speaker at the MIM-CPM International Management Conference 2012 organized by the Malaysian Institute of Management and the Institute of Certified Professional Managers, held on the 17th of October 2012 at Taj Samudra Hotel, Colombo. Anushka made a presentation titled The Five Keys to Unleash Sri Lankas Potential for Economic Expansion and Job Creation

Workshop on Experimental Design for Savings and Payments Research: South Asia IPS, in partnership with the Global Financial Inclusion Initiative at Innovations for Poverty Action (IPA), organized a training workshop on Experimental Design for Savings and Payments Research from 10-13 September 2012, at the IPS Conference Room 42 TE DIGEST Jul - Dec 2012

Staff Spotlight

The Innovative

50,000

77.3%
The number of internet and email subscribers in Sri Lanka increased by 77.3% Year-on-Year (YOY) during the second quarter of this year reaching approximately 1.15 million subscribers according to the latest economic indicators report from the Central Bank of Sri Lanka. The number of cellular phones in the country also saw a minor 6% increase reaching a figure of 19.27 million during this period.

FAST FACTS

Librarian
about the subject and wanted to implement what I had learnt. Following many failed attempts to find a job at a library, I came across a job vacancy advertisement at the Buddhist and Pali University which I applied for and was successful. I have been in this field ever since. What would you say is your biggest accomplishment thus far, personally or professionally? In my profession I have had the rare opportunity of being recognized locally and internationally and for this I am profoundly grateful. I received my PhD in Information Management from Leeds Metropolitan University. While pursuing my PhD I was appointed as the chairperson of the regional activities at IFLA (International Federation of Library Associations and Institutions) covering Asia, Oceania, Africa, Latin America and the Caribbean. Further, I was also on the advisory committee for ATLA (Access to Learning Award) through the Bill & Melinda Gates Foundation and I even had the good fortune of meeting Bill Gates himself! What is the next skill set you want to add to your repertoire? Aside from my professional life I have made a commitment to reach out to the wider community, especially in rural areas. I work with lots of people at grass root level to make them aware that through the knowledge provided by libraries a whole new world can be discovered. My latest ambition is to learn, master and eventually train the art of digital story telling. I believe that we can use this to educate people and provide library services - it is very interactive. I want to help children express themselves and think analytically using this. What opportunities are available for librarians in Sri Lanka? Loads of opportunities! Job vacancies are advertised in abundance but you have to make a commitment to play a different role and you will have a huge market in front of you. Most international organizations, even highly reputed companys such as Google, hire librarians. So, there is a massive market within Sri Lanka and internationally. What is your favourite area in the library? In my view, the entire library is MINE and I love every inch of it! But having said that I am not keen on routine things to catalogue numbers, index. Name one thing about yourself that most people wouldnt know. Most people are not aware that I have a pen name. I contributed to a leading national paper as a columnist under a pen name and I used to get very good feedback. Also, some years ago I published a poetry book. One final question. We cant end an interview with a librarian without asking about your own books! So, what books are you reading currently, or read recently, and would you recommend these to us? I recently read an English book Half of a Yellow Sun by award-winning Nigerian author Chimamanda Ngozi Adichie about the Nigerian civil war and a Sinhala short story book named Ara mihiri seenu naadhaya by Liyanage Amarakeerthi, a lecturer at the Peradeniya university. I highly recommend both books - they are well crafted, engaging and creatively written.

A survey conducted by the Ministry of Health in Sri Lanka in the latter half of 2012 revealed that more than 50,000 dengue patients have been detected in the country last year. About 264 people died as a result of the disease.

14 million 4,627
Close to 14 million meals were served at the 2012 Olympic Games in London, where an Olympic village consisting of 10,500 athletes residing in 2800 apartments were catered with breakfast, lunch and dinner. Officials state that the athletes had consumed nearly 330 tonnes of fruit and vegetables throughout the duration of the games.

Premila Gamage has been the Chief Librarian at IPS for the past 15 years, and is developing new ways of combining library science and IT to ensure IPS researchers have the best possible access to local and global information. Tehani Welgama (Project Intern) interviews Premila to find out more about what drives this innovative librarian.
Premila, libraries have been around for a very long time. What challenges do you face in innovating on such an old science? The challenge, in my opinion is to be a part of organizational development. This is relevant to libraries globally. How are we to move away from the information provision model, to identifying, influencing and shaping the manner in which information can make a change institutionally, socially and culturally? That is where we need to innovate. What is your philosophy on the role libraries and librarians play in the process of innovation in a country? What can we do without libraries? How will a nation move forward without information literacy? We as librarians are responsible for knowledge creation a facilitator of innovation. We are not only responsible for information gathering and the safe keeping of books but we are a multi-disciplinary profession. We try to make a nations people aware of information literacy and try to teach them how to use it independently in order to enrich their lives and also help the decision making process in organizations. How did you enter into this field? Completely by accident while looking to fulfil my curiosity! After my A-level examination I started working as an assistant accountant (even though I had no formal qualification in this field) and I happened to stumble upon a classified advertisement calling applicants to follow a Library Science diploma at Kelaniya University. The advertisement awakened a curiosity which made me to apply for the course. By my final year I felt passionately
TE DIGEST Jul - Dec 2012

1,000
US$60mn

Sri Lanka's state-run Bank of Ceylon has been ranked among top 1,000 global banks by UK-based Banker magazine. Bank of Ceylon serves over ten million customers island wide through 600 branches and has a rating of 'AA+(lka)' from Fitch with a stable outlook.

3.6 0
billion
The International Air Transport Association (IATA) released an industry traffic forecast last year showing that airlines worldwide expect annual passenger numbers to rise to 3.6 billion by 2016 - about 800 million more than 2011. The growing middle class in major markets like China and India is driving demand for leisure in general and air travel in particular. Over half of the new passengers are forecast to travel on domestic routes rather than international ones.

Following a ruling by a US-based arbitrator, Sri Lanka's state-run Ceylon Petroleum Corporation lost a 60 million dollar arbitration claim over oil derivatives against Deutsche Bank. A British court has also ruled against CPC in a case brought by Standard Chartered Bank, but the petroleum utility won an arbitration case in Singapore brought by Citi group. CPC bought into a complex options-based contract with heavy downside risk to resist global price increases and control oil prices at home.

$2.5billion 440,000
HSBC and Standard Chartered, the two biggest UK banks by market value, are to pay more than $2.5bn in fines as part of record settlements with US authorities over recent money laundering allegations. The broad allegations against HSBC were detailed in a report last July by the U.S Senate Permanent Sub-committee on Investigations. The bank was alleged to have stripped details from transactions that would have identified Iranian entities, which may have put the bank in breach of US sanctions against that country.

6.2%

Sri Lanka's Disaster Management Centre stated 4,627 people across Sri Lanka had been displaced by flooding during tropical cyclone Nilam that passed over Sri Lanka in October 2012. Flooding resulting from the cyclone damaged about 1,000 houses, the centre said.

The Asian Development Bank downgraded the growth forecast for South Asia for 2013 by 0.2 percent to 6.2 percent on a slowing Indian economy and low tourism earnings in Maldives due to weak Western markets.

If the United States federal government began right at this moment to repay the U.S. national debt at a rate of one dollar per second, it would take over 440,000 years to pay off the national debt.

500

Sri Lanka will soon have 'zero time' customs with an automated customs clearing process to begin up to 24 hours before a vessel docks at port according to Customs chief Neville Goonewardena. Sri Lanka is implementing the latest version of Automated System for Customs Data promoted (ASYCUDA World) initiated by the United Nations Conference on Trade and Development. "If all the taxes are paid, you can clear the cargo in 'zero time'," Goonewardene told a forum organized by the Ceylon Chamber of Commerce in November last year.

1,299

The Sri Lankan government plans to convert an old colonial building in Colombo to a 500room five-star hotel. The Grand Oriental Hotel (GOH) in Colombo Fort, owned and operated by the Bank of Ceylon (BOC), and adjoining lands owned by the Police Department and the waterfront near the Colombo Port will be developed to build a five-star hotel while preserving the old heritage. The project will be carried out under a private-Partnership (PPP) scheme at a cost of US$ 1 billion.

Water and sanitation remains a development issue across Sri Lanka. According to recent findings by UNICEF-Sri Lanka, 1,299 out of 9,662 schools across the country do not have functional sanitation facilities available for their students.

US$110 billion

According to recent UNEP findings, replacing all inefficient lighting worldwide would save countries almost US $ 110 billion annually. In the 3 years from 2009 to 2012, the phase out of inefficient lamps in the EU alone has resulted in the reduction of 15 million tons of CO2 and saved 40 billion kilowatt hours of electricity per year.

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