LEARNING TO LOVE BIG BUSINESS

Why big business matters, and how to correct the reflexive disdain for them

Four decades after Sri Lanka liberalized, the growth of its businesses has hummed and hawed. This hasn’t always been the case. The century since the British took control of Ceylon in 1815 was a period of unprecedented economic advancement led by private ventures. For all their faults, the occupiers did three things. First, they made a huge bet on export agriculture – Coffee first, then coconut followed by tea. They then built internal transport infrastructure and developed a major port in Colombo linking rural plantations to the city and the world. Building the trade-facilitating infrastructure was the occupiers’ second achievement.

Third, they linked every commercial undertaking here to Britain, then the world’s pre-eminent power.

During the occupation, the British methodically exploited the country’s resources. However, their successful economic model also sparked private enterprise growth for the first time. These businesses outlasted their occupation and some are still around.

The triple bet on agriculture, infrastructure for open market efficiency, and links to Britain itself paid off, propelling Ceylon, as Sri Lanka was then known, to the league of Asia’s richest economies alongside Japan, Hong Kong and Singapore (then a part of the Federated Malay States).

Although there have been periods of relatively fast growth in the last century – and since the nearly 30 year-long conflict ended six years ago – and its people remain wealthier than their South Asian neighbours, Sri Lanka’s standing as one of Asia’s most vibrant economies is a distant memory.

Today, Sri Lanka’s per person GDP is only a quarter of Japan’s, 18% of Singapore’s and 17% of Hong Kong’s.

Meanwhile, turn of the 20th century laggards Malaysia, Taiwan, Thailand, South Korea and China all now have far higher per person GDP than Sri Lanka.

Flourishing private enterprise together with efficiency gains garnered by the best of those firms had much to do with Sri Lanka’s dominance a century ago and explains much of its decline since.

After its 1948 freedom from occupation, its rulers embedded short-termism in the system. Successive post-occupation rulers chose populist measures from price controls and subsidies to commercial freedom-sapping regulations. Autarkic polices – those supporting the condition of self-sufficiency – were widespread in the decades following independence. When Sri Lanka broke with these polices in the late 1970s’ the rest of Asia had caught up and overtaken it.

For example, Japan, which also stalled following the Second World War (its per person GDP halved in 1945 compared to a year earlier) was no richer than Ceylon then. But by 1977, when Sri Lanka abandoned its stifling economic control, Japan’s per person GDP was eight-fold higher.

After its 1948 freedom from occupation, its rulers embedded short-termism in the system. Successive post-occupation rulers chose populist measures from price controls and subsidies to commercial freedom-sapping regulations. Autarkic polices – those supporting the condition of self-sufficiency – were widespread in the decades following independence

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ri Lanka is a terrible and brilliant place for business at the same time. It stands at the crossroads to the East and West. It’s a land of beauty, fertile for growing food and has enough natural resources. But it’s terrible because it ignores conditions that made it a successful place a century ago. In fact, its disdain for large businesses exaggerates their corruption while confusing their vital role in the continued success of Sri Lanka.

This isn’t a simple misperception. It feeds off a popular esteem for those with small businesses like a rice farmer, a shopkeeper or a coir factory owner. By prioritizing and orienting policy after policy to suit rural small businesses, policymakers are handicapping big business – and in the process, they are lowering productivity and hurting Sri Lankan competitiveness overseas.

Ingrained biases are obvious. “Producer republicanism’ is one such idea, where to be free a citizen must have economic independence. Focusing on producer republicanism comes at the expense of individual economic freedoms because the polices driving their adoption are contrary.

The small business and family farm mentality isn’t just political expediency. Sri Lanka’s widespread, poorly targeted and mishandled farming subsidies are an example of producer republicanism.

But how did big business go from a symbol of Sri Lanka’s economic emergence to one of widespread scorn?

Parts of Sri Lanka remained in a time warp before and in the decades since independence. In isolated and lagging regions it has been possible to corner the voters with the narrative of “them” and “us”, setting up people against evil corporations.

High profile scandals like the bond scam (where bond interest rates were willfully manipulated), failing finance companies and corrupt privatizations certainly haven’t burnished the image of big business.

Shareholder movements, which value nothing besides profit (preferably in the near term) have also distracted from the job creating, innovating and economic capacity building benefits that big businesses bring. However romantic the idea of self-sufficiency, it is no longer a relevant one. Many decades ago, most Sri Lankans became salaried workers. People are now leaving farms – which have failed to deliver prosperity – in droves.

Urban workers have many challenges, including affordable housing, career advancement and poor public services. However, transporting them back to the villages to manage the family farms is not the answer to improving their lot.

In fact, the most prosperous region in Sri Lanka is where self-employment is lowest and the most backward and poor regions are those with the most self-employed.

Shareholder movements, which value nothing besides profit (preferably in the near term) have also distracted from the job creating, innovating and economic capacity building benefits that big businesses bring

Reality and perception part ways at another point – and that is how workers are treated in big businesses versus those at small businesses. Employment at large firms is steadier and workers can come to expect retirement benefit contributions, reasonable working conditions and much higher pay than the small businesses in the informal sector. All over the world, the reason for the disparity is identical – smaller the firm the lower the productivity. A family farm or small factory is a hopeless occupation and even with the preferential and low income tax of 16% instead of the standard 24%, these businesses have no future. Worse still, misaligned incentives like low taxes, subsidies and eulogizing small businesses has the chilling effect of artificially prolonging their existence at great cost to the rest of the economy.

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espite democracy, Sri Lanka’s institutional framework to formulate and implement economic policy has been weak. Its remarkable economic success during the 19th century should offer plenty of clues on the need to integrate the Sri Lankan market with the rest of the world because the 21 million people here are just too few.

However, Sri Lankans don’t confront this decline because they have no appreciation for their relative standing. In absolute terms, life here has improved but those changes pale in comparison to the achievements of others. They first have to start questioning their predicament. Perhaps then they can start to learn lessons from their own past.