Page 1
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INDUSTRY
2

Page 2
Colombo Con sumner Price Index (Commodity wise) 1952= 100
1,500
600 500 .っ*ー
եւ00
300 Fuel & Light 1,000-200 /
100 AL I TI MES
is 78 SO 82 84 g5 - 1
Food
5OOH
Clothing “へ』とヘイ
Rent `ܠy
1976 1978 1980 1982 1984 1986
Rs. Min
40ջ000,
Total Public Investment and Allocations on Ongoing Programms 1987-91)
30,000
20,000
للمد C 凯 4) U} ն) s 10,000 드
O er
H O
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1987 1989 1990 1991
Rs Mim A (GRICULTURI INDUSTRIES HUMANS 12,000
LO(AIAI. LOCATIONS
ALLOCATION OF GOVERNME
FOREIGN CAPITAt EXPENDTURE AIOCATIONS ON GOING PROJECTS 10,000- (SECTOR SUMMARY) 1987
CO CO OU) 8,000
6,000
4ջ GOD
2,000
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爵
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Yn NutS "OOO Mt. Tons
Mn. Kgs 300 3000 300
Tea ) 200 2000 200
~ം, Rubber Coconut ہ۔--عر
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100. 1000 1000
Production Trends in Major Agricultural Crops (1977-'86)
O
77 86 77 86 77 * 86י
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Econom ice
ECONOMIC SOCIAL INFRASTRUCTURE SETTLEMENTS INFRASTRUCTURE & HEADMISCELLANEOUS
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(CNOMQ |
RAVITEANN Volume 13
Published by the People's a Research Department - Diary of Head Office sir Chittarmpalam A. Gardinar Mavvatha, Agricult Colombo 2 エ三 Sri Lanka
Foreign
Commo:
E.M. Wij
A. A.Jus:
Andy C.
| D RC
Nima A
Jeffrey J Jacqueli
L SS0 LSSSSSSLSLSSSSS S S SS SS SS SS promote knowledge of and interest in the economy and economic deve e
NEXT ISSUE L0 e SS S S SSS S S L L L L L L S
GPortage acts and debate. - 兴 THE CONOMICREVIEW is a community Thes Service project of the People's Bank - Oppo LL S 0 L JL00L00LLS SS LL J L LS LLL LLLL L LLLS * The N editoria considerations only and do . 출 The not necessary effect Bank policies or 关 An as the official viewpoint. Signed feature articles also are the Per SON al Views of the דר authors and do not represent the COVER institutions to which they are attached Similar contributions as vel as Sepalika
conners an viewpoints are welcome. |-E ECONGMC REVEVAV, ils published monthly and is available both on Subscription and on direct sale,
 

Numbers 3 & 4 June/July 1987
CONTENTS
COLUMNS
Events 2 April 1987 Աre 15 Drop in paddy production effects national
growth performance Potato turned into a successful commercial crop
News Review 18 UNCTAD V/| |
dities 20 Coconut. Decline in production and ear
nings in first quarter of 1987 ܡ
SPECIAL REPORT
3. MANUFACTURING INDUSTRY
anaike 6 Reflections on industrial development in
the post-independence era
tin Dias 10 Burning issues of Public Sector Manufacturing Enterprises
FEATURES
21 Biotechnology- Need for a Rational Policy
rump 23 Third World demands justice over seeds
24 Different countries, different needs
Fernando 26 Some aspects of the Informal Rural Credit
Market in Sri Lanka
Schott & 29 Trade in services and developing countries ne Mazza
mall holder in the Plantation Sector
rtunities for chemical and processing industries in Developing Countries Multifibre Arrangement and the new clothing exporters price of fish an assement of influencing factors sesment of the SM Credit Scheme
Fernando

Page 4
April
The colombo consumer's չost of April 1987 was 638.6 the Departime statistics onced in March 1987 it Nas arch 1986 it . 598.3. ' 琵
貂 キhe Japanese Government offered
台s10Q તાion(equivalent to 680 million medical equipment to the Govern distribute among ten hospitals 量 equipment Co સિંહ of laboratory ope તહntal theatre e: - - - trical equipment
project. This phase AAN
for developing extension pack es for small holders. 王王
solidation activit
itish dairy farmers are a fined
| 16 Brit; -ー-ニ-ー -
| ceeding miko Qu○。
mist. production لاotas argSetآ 醒
드c di violati f these c a fine. 壹_
19 Japa said it would appeal , the General Agre
Tariffs and Trade (GATT) . against American tariffs on selectronics exports, states án Econom"
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

eco NoMVC REVIEW لحلالE/ فال
ly 1987

Page 5
INDUSTRY DIVISIONS
39. Other Manufacturing industries
38 Fabricated Metal Products
37 Basic Metals
36 Non Metallic Mineral Products
35 Chemicals, Petroleum,
Rubber & P|astjCS
34 Paper, Printing & Publishing
33 Wood & Wood Products
32 Textiles, Wearing Apparel & Leather
31 Food Beverages & Tobacco
MANUFACTURING IND
Industry has been looked upon as one of the kev areas in the economy that could help to step up economic growth in 1987. By early this year prospects for growth and employment creation in most other sectors of the economy appeared increasingly limited; and agriculture, construction and services were all assigned a limited growth potential over the next five
year period. The expected constraints
to growth in the non industrial sector pointed strongly to the need for stepping up the rate of growth in the manufacturing sector.
The Finance Ministry's Public inVestment Programme 1987-1991 was emphatic that 'the most dynamic role in stimulating economic growth, employment creation and export development in the medium term ahead will
ECONOMIC REVIEW JUNE/JULY - 1987
have to be pli sector. To ad form this role,
generate rates of the average the last few yea
The Nation the Ministry in dustrial sector immediate afte nomic reforms increase in grov in response to ports and exch couraged a bett trial capacity ar facturing. But has not been ad average annual trial output be being only 5.7 p
 
 
 
 
 

|UMBER OF ESTABLISHM ERSONS ENGAGED AND Y || NDUSTRY D | V | S | ONS
ENTS, VALUE ADDED
All Establishments
A Persons Engaged
Value Added
Percentage
DUSTRY
ayed by the Industrial
equately perform perthis sector will have to of growth far in excess 5.6 percent obtained in rs".
al Planning Division of its analysis of the inmaintains that the rmath of the 1977 ecowitnessed an impressive Vth of industrial output he liberalization of imange controls. This ener utilization of indushd investment in manuhe growth momentum equately sustained, the growth rate of industween 1978 and 1985 lerCent.
50
Source: Census of Industry 1983 Dept. of Census and Statistics. The growth rate in manufacturing
has been grossly inadequate for a country which has to establish a firm industrial base for future economic growth and employment creation. Successful non-oil developing countries in Asia such as Korea, Taiwan, and Singapore have registered much higher rates of industrial growth in the initial years when the breakthrough was made. Average rates of growth of industry in these countries ranged between 25 and 30 percent in the breakthrough period.
Industrial growth at a rate much higher than in recent years must also be achieved if progress is to be made in tackling the balance of payments problem and in providing employment to a rapidly rising labour force. Debt service, already equal to 30 percent of the annual value of export of goods and services, will rise further if export receipts cannot be considerably expanded. This would irretrievably damage Sri Lanka's creditworthiness
3.
صحت

Page 6
The unemployment rate which declined to about 14 percent in 1985 appears to be rising rapidly again. A recent estimate suggests it could rise to 19 percent by 1989 if radical measures are not adopted to spur industrial growth. This is particularly so because the other sectors are not capable of substantially absorbing the rising labour force and also because their deveopment prospects are intrinsically linked to the growth of the industrial SeCÈO.
It is the apparent constraints on potential growth in the non-industrial sectors that point so strongly to the need for a rate of growth in the manufacturing sector considerably higher than that attained on average in the period 1978 to 1985. To quote the Public Investment Programme 19871991, **Only vigorous, healthy, manufacturing development, backed by bold, far-reaching policy measures, can improve growth prospects, ease foreign exchange constraints, and reduce the relative dimensions of unemployment that were foreshadowed above. If such growth in the manufacturing sector can be secured, it will also have strong positive multiplier effects on the growth of the non-industrial sectors'. The planners see the obstacles to a more rapid expansion of the manufacturing sector as insufficient (a) demand, (b) investment funds and (c) foreign exchange. They argue that demand constraints, however, are not absolute. There is scope for further efficient import substitution and especially for the export of manufactured goods if the considerable opportunities to improve efficiency in manufacturing are vigorously exploited. Moreover, the impact of more rapid growth in manufacturing on other sectors, would result in secondary increases in demand for manufactured goods.
The remedies suggested for investment constraints are: policies which stimulate savings, make investment in manufacturing more financially rewarding, and lead to the more efficient use of capital. In particular, foreign direct investment could play a more
prominent role in in of investible funds : the inflow of foreig improving the skill. labour.
Ways of overcon
of foreign exchange posed new policy er would improve the Lankan industry. Th there are consideral troduced by policies import-competing an ted manufacturing V either net foreign e; earning. Thus it is p train growth in man grounds of an app: foreign exchange.
The Planning Div is that 'to provide a dard of living for it tion and to Create er expanding workforc achieve considerably efficient growth in i industrial growth is reduce the degree ( the economy upon agricultural exports to fluctuations in ir and climatic condit major broad object zation there is also more balanced regic dustries, to encour and medium scale achieve technologi However, it is neces hazard regional disp tion of non-viable : Scale industries, an technologies which the special needs o the industry concer
Industrial Strategy
To prepare a s' these objectives th pointed an industri tee (IPC) comprisi vernment officials of the private secto submitted to Cab 1986. It was appro

reasing the stock ld in stimulating know how and of Sri Lankan
ing the shortage |re seen in a provironment which efficiency of Sri argument is that e distortions in
an expansion of d of export orienon balance be change saving or oor policy to resufacturing on the rent shortage of
ision's conclusion
satisfactory stan
growing populamployment for its 2, Sri Lanka must more rapid and ndustry. Vigorous required also to of dependence of a narOW range of which are subject Iternational prices ons. Within these Ves of industrialineed to foster the nal growth of inge efficient small industries and to cal advancement. sary to avoid hap2rsion, the promomall and medium I the adoption of do not cater to the country and ed''.
rategy to achieve Government apal Policy Commitg senior level goand representative . Their report was het in December,
Ved and an indus-,
trial Development Council of Ministers (DCM), chaired by the Presidinet, was established. The DCM is to oversee the work required to bring the policies advocated in the report to the stage of implementation and to monitor and supervise the fine tunning of their implementation. It will ensure consistency in the future development of policy and the industrial development strategy.
The DCM is to be serviced by an industrial Development Committee (DC) with representatives from the Ministries of Industries and Scientific Affairs, Rural industrial Development, Textile industries, Youth Affairs and Employment and Finance and Planning, the Greater Colombo Economic Commission, the Foreign investment Advisory Committee, the Local industrial Advisory Committees, the Export
* development Board, the Sri Lanka
Business Development Centre and three other representatives of the pri
vate sector. One of their responsibilities will be to determine in detail the nature of the coordinating machinery
required among the relevant government agencies to implement the strategy.
Public Sector Manufacturing Enterprises
Although the relative productivity, in terms of return on capital and value added, in the private sector is higher, the public sector has shown significant performance improvements relative to previous years.
Many capital re-structuring studies relating to manufacturing corporations have already been completed. Others are continuing. These are expected to assist Government in addressing probems concerning rehabilitation, reorientation and privatisation.
While performance improving and capital re-structuring exercises are progressing, legislation has been passed by Parliament to enable con Version of Public Corporations and Government Owned Business Undertakings to Limited Liability Companies. Further
EconoM1C REVIEW JUNE/JULY - 1937

Page 7
privatisation by transfer of equity, management contracts, etc., are due to be introduced as appropriate. A Public Enterprises Re-structuring Unit is being set up in the Ministry of Finance and Planning to implement a phased programme of privatisation and to facilitate operational autonomy in the commercially oriented public enterpriS€S. - -
According to the Ministry, Government policy towards public sector industrial enterprises will continue to be based on the basic principle that no government capital will be invested in
the future in any new, commercially
oriented enterprises. lt has been decided that the Government will invest in such ventures only if they are considered vital from the national point of view and the private sector is unable to invest in them due to lack of capital or other reasons. Even in such circumstances, the first endeavour would be to enter into joint ventures with the private sector, with plans for future diversement of government equity".
But many problems still confront the efficient operation of these public enterprises, and the Secretary to the Ministry of Industries Mr Justin Dias illustrates this in his paper on pages 10-14.
Role of Incentives
it is essential that incentives provided to manufacturing stimulate investment and promote the efficient utilization of resources in the sector. The case for providing the manufacturing sector with incentives depends upon the greater general potential for manufacturing, compared with other sectors, to generate growth as a result of the acquisition of skills and technological knowledge. It also depends, in Sri Lanka's case, upon a bias in the way in which investors view investment in manufacturing. This bias has resulted from their traditional preoccupation with and skills in promoting trading activities.
However, there are real costs as welf as benefits arising from the provision of incentives or protection. In effect,
ECONOMIC REVIEW JUNE/JULY - 1987
protection provi
facturers and ul ceed the cost o sources being u. industry would Come if used in subsidized industl Work undert: tial Tariff Com Vealed a fairiy effective subsidy 80 percent. Mc protection is dist among different within industry tive of the new this dispersion a the advice of th in this direction When a large in were revised.
Another maj high a level of stifling competit late firms to see nologies and WC tices.
Various othe
- proposed by the and Planning to
further investm sector. Among t export industrie added in export vestment relief.
Import Competi
in the import strategy is con ready being pur tial Tariff Comr become the ma providing assist going in the PT of protection. port controls ar.
A four-tiered be introduced C with a targeted tance around 5 greatly reduced among industric more stable in
in that levels known in advan.

des a subsidy to manuless the benefits ex
f the subsidy, the re
sed in the subsidized genrate more real in
less subsidized or un
ries. - aken by the Presidenmission (PTC) has rehigh average level of to industry of around pre importantly, this tributed very unevenly industries and even roups. A prime objecstrategy is to reduce ind the Government on 2 PTC took a first step in the 1986 Budget umber of tariff rates
or problem with too protection is that in tion it fails to stimuknew and better tech}rking skills and prac
incentives have been 2 Ministry of Finance stimulate growth and ent in the industrial hese are incentives for s, assistance to value is, and income tax-in
ng Industries
-competing sector the sistent with steps alsued by the Presidenmission. The tariff is to jor policy instrument
ance and work is on
C to update measures "he few ramaining im
to be phased out. tariff structure is to ver a four year period average level of assis
0 percent and with a
dispersal of assistance is. This will provide a Vestment environment of assistance will be
26.
Anti-dumping measures are to be introduced to prevent disruption in
domestic markets resulting from the
occasional sale of subsidized products produced in other countries and from predatory dumping. -
The manufacturing sector has been able to show progress despite the many problems it has faced in recent years. The World Bank has in most of its annual appraisals emphasised the need for a clear cut policy on industry, a typical comment being 'The absence of an overall industrial strategy has been a major factor underlying the poor performance of the manufacturing secior. As á result, the policy framework for manufacturing has been shaped by a number of groups with different interests and views. This had led to the adoption of a large number of selective policies which in aggregate often conflict with one another
drawing resources into inefficient acti
vities, giving confusing signals to potential investors, and generally slowing. expansion. While such a situation is certainly not peculiar to Sri Lanka, the malaise of the industry and trade policy had drawn particualr attention because of the strong commitment and clarity of purpose demostrated by the Government in undertaking the 1977 reforms'.
it was statements such as this that
continued to emphasise the need for a clear statement of policy and to focus on the numerous issues and resultant cross purposes in attempting to develop a harmornised, liberalised trade sec
tor along with a viable manufacturing SeCtO.
Many issues still need to be resolved and the 'reflections on specific aspects of industrial development by Mr. Mahinda Wijenayake who is closely , associated with many official industrial finance institutions and Counts many years of involvement with industrial administration both in the Public sector and Private sector and also wide experience as an international industrial consultant focus, in the following paper, on some of the main areas of
COCer.

Page 8
REFLECTIONS ON INDUSTRIAL DEVELOPMENT
POST-INDEPENDENCE ERA
E. M. Wijenaike
Chairman, people's Merchant Bank, Director People's Bank and DFCC
While industrialisation is certainly an important objective for a developing country, it is not something that will just happen in most developing, Countries, Government interVention and support is necessary and reach country depending on its own socioeconomic conditions, must fashion strategies and policies to suit its own particualr needs and its factor endowment. There is no uniform or Common strategy of development suitable for all developing countries. It is also even more important that when strategies
and policies are formulated they must
be translated into a concrete programme of action which is pragmatic. it would appear that what has happened in Sri Lanka is that although the strategies and policies over the years have been generally sound successive governments have found it difficult to create the environment necessary to
accelerate the tempo of industrialisa- .
tion in terms of practical action pro
grammes, except perhaps the present
government which has certainly done better than all its predecessors. Admittedly this lack of success by previous governments may have been for reasons somewhat beyond their control, to some extent like the external shocks of the sudden oil price hike in the 1970's. It would appear also that the direction of industrial development in Sri Lanka has been affected very much by the political ideology of the particular government in power and also sometimes by the impractical ideas of bureaucrats holding high positions but with little or no knowledge of industrial management.
industrialisation prior to 1960
Prior to 1960 through the establishment of import substitution industries, was justified on the grounds that it would help to
industrialisation
reduce the dependent on the export of prin reducing the demand increasing local outpu growth of output a
turing the economy standards and provide
surplus labour.
However, in this ir dustrialisation little p except for the establ government enterpris protection for infant early 1960's the gove which had to face an change shortage, cont cies with great vigour of import substitutio manufacturing essenti essential items were s entrepreneurs. These tion industries were the protection of hig and generous tax bene 'infant industry a foreign exchange cri. very restricted licenci ficences were require
terial and machinery
change rate Was grc and interest rates ker the consumer with th trepreneurs preferred intensive technology labour intensive techr
facturing. Considerab
also placed on the public sector industry
dustries started at th
use local raw materi dustries earned enor
there was no compet
tal- intensive public such as steel, hardw started.
Changes in 1965
When the governn 1965 somewhat O

N THE
y of the country hary products by for imports and t. It was felt that one by restrucwould raise living employment for
litial phase of inrogress was made shment of a few es despite some industries. In the nments in power acute foreign exinued these poliOuite a number in industries both al as well as nontarted by private import substitudeveloped under gh tariff barriers fits based on the guments'. The sis resuited in a ng system where
d for a raw ma
imports. The ex}ssly over-valued it low to protect he result that ento import capital
rather than use nology for manu- :
le emphasis vivas
development of . Most of the in
his stage did not ais. Protected inmous profits as ition. Large capi
sector projects
are etc. were also
ment changed in te liberal proce
dures were introduced for starting industries which gave a greater fillip to industrial development and private enterprise. However, the policy of the previous government it regard to
maintaining and strengthening public
sector industry continued. Under the government particularly one significant contribution towards industrial development was the establishment of the Industrial Development Board
which was specifically created to pro
mote industrial development. A two tier excahnge rate was also introduced to help industrialists.
Policies and Strategies in 1970
In 1970 with the next change of government the policies and strategies for industry were changed again in line with current economic thinking and the government's own political ideolo
gy. The basic needs employment gene
ration strategy for industrial development was adopted. It was also decided that greater emphasis should be placed
on public sector industry which would be the main instrument for industriali
sation. As far as the private sector was
concerned assistance and incentives
were given for the promotion of la
bour intensive small scale industries based on appropriate technology. The Industrial Development Board was Vested with the special responsibility for the promotional work in this regard. In addition to the large expansion of the public sector by the Ministry of
industries, the Ministry of Planning it
self through Divisional Development Councils got involved in active promotion and implementation of small in
dustrial projects, based on appropriate
technologies, in many cases with disastrous results as the officals concerned had unfortunately no knowledge of in
dustrial management at all. By 1977, the situation in regard to industrial development had been reduced to an extremely sorry state, due to over regu
lation, exchange shortages, labour un
rest, mismaragement in public sector
industry and almost total lack of entrepreneural interest in the private sector. Nearly all DDC projects were
ECesidiviG PREAA EVA- JUNEZJULY- 3987.

Page 9
failures. The small certainly did not turn out to be beautiful as was the hope of the government. However,
there were windfall profits for some
private sector firms due to import shortages.
Open economy from 1977
In 1977, there was another change in policy with the present government introducing policies and strategies to promote an open economy. Under the open economy, except for a few sectors, there is allowed the un restricted import of machinery and raw material to entrepreneurs who are interested in starting new industry. On technology too the Government's position appears to be today an open one. Regulation of industrial development was reduced to a bare minimum. Protection however continues for certain import substitution industries. Some of these import substitution industries ran into difficulties because cheap imported goods were being dumped in Sri Lanka by certain developed countries. Ouite a few large industrial concerns which prospered much during the previous regime, under conditions of virtual monopoly, have also got into serious difficulties partly due to management inefficiency and continue to be in dif
ficulty. The apparent over-valuation of
our exchange rate against certain currencies has also compounded problems of liquidity, resulting in many large industries having to operate at low capacity utilisation, with serious effects on their viability. However, overal there has been an impressive growth of new industrial enterprises and a considerable fillip given to existing ones. 1984 appears to have been a particularly good year recording the best performance of industrial exports in a decade.
Three phases of industrialisation
The objectives, policies and strategies for industrialisation in developing countries have been the subject of much debate amongst economists over the years. To summarise what I have said at the risk of repetitidin, in the
ECONOMIC REVIEW JUNE/JULY - 1987
first phase of Lanka the goal ( tO re-Structure til would be less de of agricultural
self reliant in re. establishment ol dustries. The s model. This wa
SUCCESS.
In the second of industrialisa change and em dered as being th of industria di basic needs-em based on utilis technology, loca abour intensive high priority. Th looking strategy economic theori Schumacher. T. looked upon pli as the main vehi trial developmen dustry was to be trial developme trofied and mori government. Thi
lure. The large e lig sector also di mance was poo private entrepre sufficient to Stil dustry.
in the third again changed it for industrial de for What is terme trial developmen the main object creation mainly ports. Unlike in however, much being placed on promote industr ket signais were than those of go kers. Expansion was restricted at try Was expecte
nues at least cov,
lic sector indust

dustrialisation in Sri f industrialisation was e economy so that it endent on the export production and more ard to imports by the import substitute ino-called Mahala nobis
only a very limited
phase the objectives tion underwent a ployment was consi2 most important goal }velopment and the ployment approach ation of appropriate raw materials and techniques was given is was a very inward based mainly on the es such as those of he government also ublic sector industry cle to promote indust. All farge scale in2 state owned. indusht was closely cone or less directed by s strategy was a fai
xpansion of the pub
ld not help as perfor
r. The incentives for
neurs were totally in
nulate interest in in
t
phase Sri Lanka once s goals and strategies velopment by opting d an export led indust strategy. Here again
tive was employment
through industrial exthe previous phases, greater reliance is the private sector to
ial development... Mar
to be more important fernment decision ma
in the public sector d public sector indus
d to ensure that reve
er Costs. No new puby were to be started.
Export led industrialisation
The arguments for export led industrial development represents in a sense the re-emergence of the free trade position and the classical theory of comparative advantage. Sri Lanka, as a labour surplus economy, by developing export oriented industries with as bour intensive technologies, will make best use of its factor endowment on the assumption of course that there are no other factors of production such as natural resources which are equally or more underutilised. This strategy certainly appears to have been much more successful than the previous ones.
There is we know still another school of thought which rejects both the free trade arguments of the export led industrial strategy protagonists and also the basic needs employment app
roach protaganists on the grounds that
such policies will perpetuate under development and also not solve the complex problems of developing countries. They advocate the adoption and acquisition of the most modern technology where the size of market permits and the country concerned is able to absorb such technology. Developing countries should endeavour to leap frog from the state of technology that presently exists in their countries and adopt the most modern. This view is gaining ground particularly with the rapid spread of computerization in some developing countries.
From our own experience however it would appear that at least at the present juncture the export led industrial growth approach is what is most appropriate for Sri Lanka.
A combination of export led industrial development and import substitute strategies is not entirely incompatible particularly where import substitution has good prospects for export orientation and provided also incentives for the latter are not more attractive than for the former.
As I have stated earlier there is no "strategy or policy that can be regarded as the perfect instrument for promotion of industry in developing coun

Page 10
tries, particularly for countries like ours which are so susceptible to external forces. It is therefore necessary to continually monitor, reappraise, and change strategies as problems arise.
Institutional mechanisms, policies and strategies
Most important, the institutional mechanisms to do this must be there. I make this point because feel that there are a large number of problems within the framework of existing strategy that have arisen, that need attention early, but the existing institution mechanisms appear slow to respond.
The Ministry of industries in 1981 stated that the policies and strategies of the government in regard to industrialisation were to promote, equal, opportunity for private and public sector industry to develop and to encourage in particular:
The utilisation of local raw material
in industry, Labour intensive industry, Foreign investhment, in manufac
turing industry, Regional development, Development of agro industry, Rural industry. Obviously for these policies to be meaningful in terms of a programme of action they have to be implemented in a concrete way which means that the following are essential:
The establishment of an appropriate institutional framework for financing, extension services, research etc. ,
The establishment of a suitable infrastructure to provide basic amenities at reasonable cost,
Legislation where necessary for the provision of incentives to achieve the
goals set out in the policies and strate
gies enumerated.
Machinery for continuous co-ordination, monitoring and review.
Problems causing concern
We know that a number of dynamic new institutions have been set up such as the Greater Colombo Economic
Commission and the N ment Bank, to help ir ment's industrial pol many others. Attra have also been provic serving both the dom markets. Older institu Development Finance the Export Developr been revitalized. The Asian Development external organisation concessional finance. there are problems fair amount of concer government's contin attention. Among the
The over-depender try on textiles, gar feum exports wh vulnerable to E Nearly 50% of th exports comprise
they have a low v over 50 per cent { ments is for the US
The grave difficult industrialists, part garments industry industry, are facil liquidity. The failure rate in rai. No statistic available. The apparent Over exchange rate in re currencies which is ties for certain exi dustries, particual local raw materials. The inadequacy C the case of certai tute industries due the domestic marl goods, and also dur The non-availabilit dustrial purposes a Ces. The industr gramme has not substantially.
The slow growth C and rural industrial development of ir

National Developnplement governicies, apart from active incentives led for industries estic and export tions such as the Corporation and ment Board have World Bank, the Bank and other is are providing
Despite all this that are causing in which need the u ing and urgent
Υη 3η θ :
Ce of the counments and petronich are highły 2xternal forces. e manufacturing these items and
alue added. Also
of all export gar
market.
ies a number of icularly in the
and the textile ng in regard to
industry in genes however are
-valuation of the lation to certain
causing difficulOort oriented inrly those usina
)f protection in n import substito leakages into ket of duty free nping. y of land for inIt reasonable priial estates probeen expanded,
fagro industries, isation. The slow |dustry, in parti
cular agro industry, in areas under the Mahaweli project.
The optimum benefits of the Mahaweli Project can only be realised when this happens particularly where employment generation is concerned. The continuing concentration of industry in the Colombo district. The low rate of capacity utilisation in many industrial units, particularly those using highly capital intensive technology. High rates of interest for working capital. Poor financial management at the level of the individual firms. Poor performance of certain large public sector industries. The need to improve considerably the existing industrial extension servi
C8S.
Although government policies are those which reject controls on industrial development this does not mean complete non-intervention. If the open economy policies and strategies are to succeed in the industrial field considerable intervention at the appropriate moment is essential, so that the environemnt for industrial development continues to remain congenial particularly for the private entrepreneurs, who will be the principal change agent to promote industrial development.
The private entrepreneur identifies,
formulates and makes decisions on project implementation. The government provides the rules of the game and the necessary environment.
This is how the system should work. Professor Lewis remarked many years ago that policies should be sensible and there should be good public administration for any strategy in industrialisation to succeed.
Having being involved for many years with industrial administration both in the public sector and the porivate sector, must wholeheartedly agree with this view from my own experience.
ECONOMic Review JUNE/JULY - 1987

Page 11
The future
Looking into the future and taking into consideration past performance and international trends would say that we can resistically expect only modest progress in industrial development in the next few years because of the Various in built constraints that exist. The Contribution of the manufacturing sector to GDP is presently only around 14 per cent. Processing of tea, rubber and coconut is included in this figure.
However, the need to press on with accelerating the pace of industrial development must continue in view of
the valuable contribution it is making
towards re-structuring the economy.
Manufacturing industry today con sists of 29 public sector corporations, about 9000 registered private factories and over 20000 un-registered small and cottage industries. About 60% of the gross output comes from public
sector corporations. The products of
the Petroleum Corporation have a very large share in this out-put.
The report on public investment for
1985-1989 mapping out the economic development strategy for the period ahead states that present policies for industrial development will continue and government's role in industrial development is perceived as mainly providing the necessary economic climate and the basic infra-structure. The private sector will have to bear the major share of the burden of developing a viable.industrial strųcture in Sri Lanka. There will be a further rationalisation of the 1977 reforms so that a selective incentive structure is provided to achieve a socially desirable rate of growth and structure of production. " In conclusion i would like to state that due to limitations of time I have, in discussing the economic policy issues relating to industrial development, mainly focussed my attention on the growth of modern factory type industry. However, the contribution of the traditional unorganised, informal sector could be quite considerable provided it is possible to structure a scheme of assistance for them.
EconoMic REVIEW JUNE/July-1987
(From statistics c
fissemminimagesmmusemssasemesmemi
Categi
Food, beverage Textile, wearing products Wood and woo (Including furni Paper and pape Chemicals, petr and plastic pro Non-nnstallic m (Except petrole Basic metal pro Fabricate di met nery and transp Manufactured where specified
Total
Provisional.
Item
1. Electricity (Gwl Sima Indu 1.2 Medium. In 1.3 Large Indu
Domestic Sales (’000 metric ton 2.1 Heavy Die 2.2 Furnace O
(a) Provisional. - (b) Sales other tha
Transfer
Corporation/Ente
1. National Milk B , Ceylon Oils and . Sri Lanka Sugar . National Textilie . National Paper . State Fertilizer
facturing . National Packag
Materials . State Printing , Ceylon Oxygen
Total
(a) Approved Esti.
 
 
 
 
 
 
 
 
 
 
 

mpiled by the Central Bank)
Value of industrial Production 1982-1986 (Current Prices)
Rs. Mi filon
ory 982 983 1984 1985 1986 (a)
and tobacco 5,246 6,998 8,623 10,497 2, 129 apparel and feather -
--- 3,863 5, 136 7,565 9,505 12,088 di products 36 522 640 705 632 ture) r products ༈ ༈ ། 725 90. 907 1,187 1,289 oleum, coal, rubber - - fucts 13,099 1,888 14,328 3, 104 1,088 ineral products 1,370 1,468 1,829 1,854 2,053 Im and coal) ducts - - - 262 302 199 23 28 al products, machiOrt equipment 904 1 129 456 592 | 757 products not else- ܡ
-- --- T4 90 06 25 36
25,904 28,434 35,653 38,692 41,453
Power and Fuel Use in Indust
Source: Centra Bank of Sri Lanka.
ry 1984 - 1986
1984 1985 1986.(a)
h) ... · sa 790.9 露5●.4 922.0 stry *毽赛 31.7 34.7 36.0 dustry e es 37.9 辜重量、亭 424. stry 387.3 404.3 46.9
Industrial Fuel (b) 233.5 163.2 莺9。等 墨 sel 23.7 20.3 9.8 . 2星李。8 42.9 29.7
n to the Ceylon Electricity Board.
of Government Funds to Industrial Enterprises 1984-1986
Sources: Ceylon Electricity Board.
Ceylon Petroleum Corporation.
Rs. Milion.
Capital Current Total
rprise -
1984 1985 1986.(a) 1984 1985 1986(a) 1984 1985 1986(a
oard... 7.5 || 0 3 2.5 25. 50.0 35.0 32、壹.3 37。第
Fats 99.H{____ 6 ,0{}-- جیس۔ -as e--a •=-----> 99 حسینیه 01 6 || 1 و
.彗4薰Q。2±5G8.3±基含Q。拿 7.44 سیاسی سے A - ov- 4星7。3翡508.3 量5●。鲁 $ .127.2{---- مج ہو 340 سیحیہ --- } = {0 = 42 .. جسے[[ -- ~~~~ 星27。2暮 30.4菲一42。拿 8.0 , 27 | 6 , 5 8.0 1 - 27 ബ - یہ ہے = 56=i}... Vanu- -
3。j{ = -27.3 563。4彗43。鲁彗27} 3ھ | 5373 --سمیہ مصیبہ۔ -- }26.1 ing
--- — i = 0} خسته —ബ 4.}{ } جیسے ബ . 5 . 6 || 3,71 - --- --- 3·하 37 - Ltd. ... ബ 6, } | 7, 6! - 6.1 i = 7 6 {; - : جیسے
727.3528.3 94.5 5766 58. 70.3 1,303.9 686.4 264.8
mates. Source: General Treasury.

Page 12
  

Page 13
those enterprises. Employees of those enterprises should be compensated for loss of career in PMEs, if they are wound up as non viable enterprises. However, careful monitoring of the activities of PMEs and diagnosing the symptoms and causes of their failures and solving those burning issues, would perhaps avoid this unpleasant situation.
What are the burining issues?
As stated earlier the burning issues of PMEs are the symptoms and causes for failures of the enterprises. Before explaining these issues would like to reproduce the following passage from the book Corporate Collapse written by 'John Argentine'. If the management of a company is poor then two things will be neglected: the system of accountancy information will be deficient and the company will not respond to change. Some companies, even well managed ones, may
named
be damaged becuase powerful cons
traints prevent the Managers making the responses they wish to make. Poor Maaagers will also make least one of the three mistakes: they will overtrade: or they will launch a big project that goes wrong: or they will allows the company's gearing to rise so
that even nor
con e COn Stan chief causes;
luck deserve in ton. The fo appear: certa deteriorate bu Mangers will : which reduces these ratios a
portance to n
finally the co teristic period
Causes an( failures, in o issues discussi most PMEs. It
aire SOrne { with specific of which will now discuss th
deterioration Tables 1 and financial ratic Ministry of Affairs (MSA it is observe (GOBU of Ur than Chemici high returns : vestment (RO al average. Ti
ANALYSIS OF FIRANCIAL PERFORAC
TABLE
Overall Ceramics Leather Mine
Saif
Profitability (Return on total assets) 8.8 3.4 4。3 32
Gross Profit Pargin 25e 220 27.0 6A
Administration Expense Ratio 8。车 1089 164 车
Selling Expense Ratio 27 5-D 车。车 O
Net Profit (Margin (B-C-D) 13.8 61 6.2 BC}
Capacity Utilisation 55.8 sãs Գ8, 7 59
Stock Ratio 248 502 213 37
Debtors Ratio 48 61 55 2
Asset Turnower 0.78. Ge 40 OO
Suspense Ratio 雷。62 24 箕。车2 25
1 - 06 O
Debt Equity Ratio 1 • 1 Տ 11
na. = not applicable
ECONOMic ReVIEW JUNE/JULY - 1987
 

mal businęss hazards bet threats. These are the neither fraud nor bad nore than a passing menllowing symptoms will in financial ratios will t as soon as they do, the start creative accounting the predictive value of nd so lends greater imon-financial' sy simptoms. mpany enters a characin its last few months’
i symptoms of business ther words the burning 2d above, are found in addition to these there Corporations/Enterprises burining issues: details be disclosed later. Let us e symptoms. Firstly, the of financial ratios. Take 1. Figures relating to 11 is of 12 PES under the ndustries and Scientific ) are given in Table 1. that trading enterprises ited Motors and Paranals Corporation) record and their Return on in) is four times the overne Mineral Sands Corpo
ration has also reported a very high return, but from the nature of its actag tead saids that this is Fort er exceptional aestresserrassert. This Corporation is mainly engaged in mining and if they obtain good prices for their products, invariably they would show good Returns on investment. Rowever it is not possible to make a gaaed a SSSRS ment by dogodking at one year's figures. En segle sigserical data for a number of years is given. It shows that financial ratios have progressively deteriorated in most cases since 1980. This position is confirmed by the index of industrial production of the Public Sector shown in the diagram. Thus the first burning issue of PMEs is the deterioration of financial ratios. Causes for this are discussed later.
When Managers of PMEs notice that financial ratios continue to Show un favourable situations they would resort to creative accounting and manupulate figures to mislead top management and the general public. The Auditor General has disclaimed annual accounts of a number of PEs as they have not conformed to the required standards and followed the accepted
CE OF MISA CORPORATIONS/G. J. B. JUj. II, 1986
ral Oxygen Plyujoods Hard Paper Salt Paran- Tyre Mining United nds uU3IC82 than & M.D. Motors
.9 7.7 (4.7) 5.8 15 2.5 31 6 1 40 3-6 31 ο ί
| o8 33.2 17, 16.9 14-7 18.2 33-5 183 31.3 25.3
= 4 196 16:Ց 9.2 2.6 14.4 11 - 6 6.1 ?。6 5.1
2 0.4 3 12.9 0.6 1。][ 0- 1 5.3 21 8ع -
= 0 13.3 (3.6) 6.7 B。8 2。[] 21.8 11 - 5 10-7 20.2
... O 859 27.5 52, 1 69.3 52. Ց na 61 9 937
O 363 186 234 238 351 128 240 518 175
8 93 7 14 ՑC) 6 2 27 23 71
。了G 0.38 1.45 0.77 0.66 ն. 85 1。42,1。17 1。02 1 266
• 51 1 - 60 116 Û• 61 1 նյՈ 5. 52 2. 74 2.95 1.65 1 - 99
• 1 Ս 0.75 957 f ● 3 2.37 (3.22 O. 4 O. O.39 0.91 O.98
11

Page 14
TABLE 2
18. Lanka Wall Tiles
RETURN ON
1980 1981
1. Paper Corporation 0.3 1 O.O. 10 2. Tyre Corporation 36.64 1910 3. Ceramic Corporation 23.0 18.0 4. Salt Corporation 32.5 43.5 5. Mining & Mineral Dev.Corpn 40.97 45.6 6. Mineral Sands Corporation 34.0 0.14 7. Lanka Porcelain Corporation 42.8 0.54 8. Oxygen Ltd 0.02 16.0 9. National Packaging Materials Cor. Nil N11 10.Tobacco Corpin 12.2 Nil 11. Gas & Water Company 16.21 Nil 12. Plywoods Corporation 22.74 1.8 13. Petroleum Corporation 50.7 Nil 14.Cement Corporation 31.8 0.01 15. Hardware Corporation 4.7 Nil 16. Paranthan Chemicals Corpn Nil 4.2 17.Leather Corporation 15.5 8.9
21 - 1 N.A.
தி
Source: Review of Activities MISA
principles. Most of the PEs have de
layed in handing over their accounts, although this ia a standing requirement
according to the Finance Act of 1971.
There is a tendancy in some PMEs to show accounting profits even if the organisation has not made any trading profits. There are instances where some PMEs attempted to treat income received from non productive activities as extra revenues in their accounts. Recently one PME showed trading profits by taking into consideration the dividend received from its subsidiary. The correct position is that this organisation has made a loss on production and trading. Thus the Financial Managers have periodically attempted to show a rosy picture by manupualting figures. Another case in point is a PME which valued its stock of finished goods at current market price but not at cost and showed a large amount of profits. These PMEs have to pay 50 percent of their profits as taxes even though they have not genuinely made profits; but this may be seen as a measure of creative accounting. In some
12
such cases their liqui so bad that they had draft sometimes to fore creative acco. not helpful. It is a c business failure.
- Requests are som PMEs to revise th structure in order of finished goods. Th toms of failures. In appeal for an increase on their manufactu cause they have in costs and paid unusa their raw material ir planning. These PM conceal their ineffic the blame on import PMEs submit request
to increase the prices
indicating that revisit view of various sta such as salary incr etc. But very little a made to minimize C. or change the produc wastages to accomm tional expenditure.

CAPITAL
1982 1983 1984 1985 1986
Nil O.33 22 8.0 1.5 69.7 0.8 18.8 40.0 14.0 4.0 O. Nil 2.0 3.4 31.0 3O.O 27.2 15.5 2.5 8.0 4.0 Nil 3.8 9.6
6.3 5.6 32.8 32.9 720 67.0 14.0 23.6 N.A. 24.0 0.3 21 3.9 7.7 Nil Ν Ni! closed closed N11 N11 N11 closed closed 0.65 N.A. N.A. N.A. N.A. O.O7 Nil Nil Nil Ni Nil 46.0 N.A. N.A. N.A. 1.0 1.7 Ν.Α. N.A. N.A. Nil Nil Ni! Nil 5.8 Nil Nil Nil 14.0 31.6 9.0 12.0 5.5 2.1 4.3 23.0 N.A. N.A. 18.2 N.A.
dity position was to raise an overOay taxes. Thereinting is always clear symptom of
etimes made by le import tariff o increase prices ese may be sympmost cases, PMEs 2 of import duties red products becreased overhead ly high prices for nputs due to bad Es are trying to iencies and place is. Similarly some
Es to the Ministry
of their products on is necessary in tutory payments
eases, allowances
Ittempt has been ost of production it mix or decrease
odate such addi
Lack of planning and stock control is one of the biggest burning issues of PMEs in Sri Lanka. Such Managers who are in charge of product planning and inventory control are not taking sufficient interest in the Public Sector. Sometimes they keep raw materials in stock for more than 2 years although in fact 4-5 months stock is more than sufficient to continue production without interruption. These Managers who are responsible to maintain stocks in line with product planning are not monitoring inventories regularly in order to avoid over-stock which results in creating a serious liquidity problem to PMEs.Similarly planners in the production division do not design their product mix according to market intelligence reports or market trends and continue the existing product mix to produce out dated goods which will not be in demand as expected by them. Such a situation may end up with higher accounting profits and in turn worsen the problems of iduidity. The above situation generally does not occur in most private sector establishments as they have systematic pian
6EC&Cà NOVA f C REVIEWj JUNE/July. 1987

Page 15
ning particularly in inventory control and designing of their product mix for the future.
There are also some non financial symptoms. Recently a foreign team of experts visited one of our PMEs and reported that general house keeping of the factory was very unsatisfactory. This could lead to various problems making it not conducive to discipline, producing high quality products, improving productivity and minimising wastage. House keeping is very essential specially in the factories to maintain high quality products. This problem can be easily controlled by the Factory Managers without incurring any additional cost to the PMEs, to achieve high quality and productivity. This is one area where Managers in the Private Sector show more concern to their responsibility compared with the Public Sector Managers. However, it must be mentioned that the morale of some public sector Managers has deteriorated during the past few years mainly due to the less attractive salaries and other financial benefits they receive compared with the Private Sector. It is necessary for the Top Managers in PMEs to avoid problems of this nature which can be monitored for better management.
The issues discussed in the above paragraphs were earlier considered not as important simply because Government policies were biased towards the continuation of PMEs, even though they were not making reasonable profits. As a result many Public Enterprises continued to fail and make no progress, and kept demanding further financial assistance in the form of subsidies and grants from the Treasury.
In 1977 with the liberalisation of imports the PMEs had to face stiff competition from imported goods and the locally manufactured products marketed by the private sector industries. With the change of Government policies to compete with the imported and local products of the private sector PMEs were requested to operate on the same lines as the private sector industries.
ECONOMIC REVIEW JUNE/JULY- 1987
και ΝΟΕΧ
PONTS | 25 -
12A, 一
22 -
2 O -
118 一
6 -
4 -
2 -
110 -
1 Ο8 -
| O 6 Ι19"
Causes of Failu
Causes of fa ning issues of not found to lapse of PM Es Cause for alm mismanagemen stated in his
Business Disast enterprise is in
gerS:
'Corporatic and men nevei rations to suit rate calamities by men. The ness disaster

OF INDUSTRIAL PRODUCTION OF THE PUBLIC SECTOR
| N || NDEX POINTS IN INDEX | | | 126
- 12 (,
- 22
- 120
- 18
- 16
ா -4
- 2
- O
loa ۔۔۔۔
79 sso 1981 1982 1983 1986 O6
feS
ailures are the real burPMEs. If solutions are these issues, total colis inevitable. The main Ost all the failures are t. As 'sador Barmash' famous book ''Great ers' the future of any the hands of its mana
ns are managed by men forget, manage Corpohemselves. Thus Corpo
are calamities created pasic cause of the busiis greed, human greed,
simple and unadulterated. In most cases, the greed crossed over the line into corruption'. Hence the shareholders should be vigilant and closely follow the activities of the Management team to ensure the enterprise will not be led to the path of distruction.
One man rule has been one of the causes of failures in some PMEs. If the Board of Directors of the PMEs is not a balanced team, the Chairman can easily assert authority and run the enterprise according to his wish. It is observed that in some PMEs most of the Directors attend Board Meetings without studying Board Papers fully and try to understand problems by liste
ning to the discussions. Such Directors
1з

Page 16
pave the Way for one man rule in PMEs. Thus an experienced, knowledgable and enthusiastic Board of Directors is a prerequisite for efficient mamanagement of PMEs. Unlike in the private sector firms, the Directors of PMEs do not hold any shares, they are only a Board of Trustees. The Trustees can undermine the interest of the share holder the general public by having one man rule.
Another cause for failure is the weak finance function of PMEs. ACcountancy information relating to cash flow forecasts, costing systems and valuation of assets are not readily available. PMEs find diffficulty in obtaining services of professionally qualified accountants because of low salaries. No reward system is in existence in PM ES to encourage managers to perform better. In most PMEs management of working capital is not conducted properly. High inventories are built up. Prompt action is not taken to deliver goods. The Marketing function is also very weak. No marketing plan is presented to the Management for discussion at the meeting of the Board of Directors of most PM ES. Procurement procedures have to be streamlined. Thus there is much room for improvement in various functional management areas in PMEs.
Managers of PMEs are not used to adopt to a changing political, social, economic and technological environment because of their limited autonomy. Unlike their private sector counterparts, the Managers in PMEs have to follow a stringent procedure to obtain their requirements and for disposing of their finished products. There is no room for negotiations. They have to implement decisions taken by external agencies. Hence it is difficult for them to adopt to a changing environment.
There are some specific causes for the failure of PMEs. Some of these causes are called historical mistakes because the present management have nothing to do with them. For example, the location of factories far away from the source of raw material supply. The cement factory in Galle, the
14
Woodwork Complex some examples. Some have to carry Over larg parts because they we purchase three years recommended spares. Spare partS have not nearly a decade. Also parts are no longer r the Country of supply in such an event the comes obsolete. The to maintain itself som the required producti tive maintenance is co PMEs due to numerou is no additional produ PM Es to continue pri the overhaul. Hence m is not done regularly. nancial difficultires P. dertake preventive ma on a phased out progra the Corporations speci Remedies
We have examined t of PM ES in detail. Whi dies. In the first insta change the manageme symptoms of failure to appear. We may management System particualr PME butif 1 team is not competent sired growth cannot be Secondly, we have defects in the accoul PMEs. This has to be in consultation with ducing a modern, cos base accordingly bec item in PMES So tha accounting system ca and a scientific analys undertaken.
Thirdly, we can ir rate Planning- strate PMEs. This planning to rationalisation of enterprises. The Corp cates the expectation expressed in terms of rate and profitability porate Planning proc Managers to observe cl

at Salawa are imes the PMEs stocks of spare re requested to equirements of Some of these been used for some vital spare janufactured in of machinery. machinery beDorporation has ehow to deliver on. No preveninducted in most S reasons. There tion line in the oduction during intenance work Also due to fiVMES cannot unintenance work Imme. These are fic issues.
he buring issues at are thé remence We have to nt team, if the are continuing have the best adopted in the he management enough the deachieved.
to correct the hting system in done carefully experts. Introt effective data »mes i a priority defects in the n be corrected s of data can be
troduce Corpogic planning-in rocess Will lead |ctivities of the Drate Plan indi)f share holders, desired growth ratios. The Cor}ss encouraging anges in the en
Vironment more closely. They have to devise Strategies to keep the enterprise in harmony with a changing environment. Also, a continuous Syste
matic Corporate Plan monitoring sys
tem will clearly identify the symptoms of failures and causes for them very early. So the Managers will have sufficient time to revise their strategies to suit the changing situation.
If PM Es continue to fail despoite the introduction of these remedies then the very existence of the PME is
doubtful. It may have to be closed
down or sold to the private sector. The private Sector may have to develop a completely new Venture out of the PME to make it a viable entity. They cannot run the PMEs in the existing form because you do not get unique Managers in the private sector to perform miracles and make it viable.
I have my reservations about the claim that Managers of the Private Sector have special abilities and they can do wonders. In fact the successful priVate sector firms such as CTC and Lever Brothers achieve their laudable success not exclusively due to mangement efficiency. They are provided with very high tariff protection. If the present tariff protection at 300 percent is removed the CTC cannot have a trade monopoly. They have to be content With a market of 40-70 percent. Similarly Lever Brothers also enjoy a bigger market share because of 60 percent duty protection. If these duties are removed they have to compete with imported products strictly. Hence we cannot conclude that the private sector possesses Managers with special capabilities to tackle various problematic situations in PMEs. If Managers of PMEs are allowed to operate in a similar environment as in the private sector they would perform equally well if not better. I have presented the burning issues of PMEs and stated that these issues have to be tackled promptly to ensure smooth operation of PMEs, and also presented some remedies to these problems.
ECONOMIC REVI FW JUNE/JULY- 1987

Page 17
AGRICULTURE
Drop in paddy production effects national growth perfo
The growth rate in Sri Lanka's Gross Domestic Product was down to 4.3 percent in 1986 from 5.0 percent in 1985. The sector whose performance was the main cause for this drop on Overall growth last year was the agricultural Sector and the crops which showed negative growth were tea (-1.3%) and paddy (-2.5%). The growth performance in Other crops of the agricultural sector could not help, and the total sector's growth rate came down from 8.6 percent in 1985 to 2.8 percent in 1986. Paddy production in 1986 recorded a decline of 2.5 percent to reach an estimated 2.6 min metric tons (124 mn bushels of paddy or 1.8 million metric tons of rice) from the highest ever level achieved in the pre vious year. However, paddy production in 1986 registered an increase of 6 percent over the 2.4 million metric tons produced in 1984. -
Last year's 2.5 percent decrease resulted from a drop in paddy production both in the Maha and Yala seasons though it was mainly from the Maha of 1985/86. This drop in paddy production in 1986 was entirely reflected in the paddy growing districts of the North and Eastern provinces. There was also a drop in net harvested area resulting mainly in a decrease of the area cultivated. According to records low output in these areas was the cause for the decline of about 20 percent in the area cultivated; in addition to a higher incidence of crop failure and the breach of the Kantale dam which affected paddy produc| tion in the Triacomalee district. Despite the increase in production and
cultivation in the
the Maha Season 3.6 percent drop was further expa. der Cultivation an lizer application a proved seed varie tion in Yala renha. as in the other Se son for the declin was the adverse v the latter part of in Maha producti 1y off-set by a sig production in pa country. For in paddy productio1 Kurunegala Dist followed by Anil MT), Polonnaruw Amparai (135,00 the Mahaweli “H The total share o and the Mahawe paddy productio. 47 percent. In Y
paddy productio)
Amparail Distri followed by Po MT), Kurunegala bantota (53,000 (45,000 MT) dist produced about production of Ya Average yield kgS. per hectare C This was an incr Cent Over that C Average yield in by 2.6 percent t increase was mai crease in produc
PRODUCTION, AVE RAGE YIELD, EXTENT HAR
INSTITUTIONAL CRED
1983,
tem Unit Maha Ya
83/84 19
1. Production '000 M.Tons 1,353 1.
2. Average yield per hectare Kgs. 3.031 3
3. Net external harvested OOO Hect. 451 3.
4. Gross external harvested OOO Hect. 509 3
5. Gross extent sown "000 Hect. 606 3 6. Fertilizer issued 'OOOM. Tons 1.13
7. Institutional Credit granted Rs. Mn 136
Source: Department of Census and Statistics National Fertilizer Secre
Economic REVIEW JUNE/JULY-1987
 
 
 

nance
other areas during
there was an overall in production. There Lsion in the area un1 also increased fertind greater use of inies, but still producned at the same level asons. The main reae in the average yield feather conditions in the year. The decline Dn last year was partnificant expansion in rticular areas of the stance, the highest
was recorded from .
rict (266,000 MT) uradhapura (159,000 a (143,000 MT) and 0 MT) districts; and area (97,000 MT). if these four Districts ili H area in overall n in Maha 1986 was ala 1986 the highest n was recorded from ct (171,000 MT) lonnaruwa (100,000
(63,000 MT), HamMT) and Batticaloa
ricts. These 5 districts
half the total paddy la 1986.
in 1986 was 3,497 ir 68 bushels per acre. ease of nearly 1 per
if the previous year. Maha 1986 increased
o 3,585 kgs, and this aly a result of the intivity in areas under
minor irrigation. In maha 1986, productivity had gone up by 9 percent in minor irrigated areas while there was no significant change in that of major irrigated areas. Productivity in rain fed
areas had dropped by 3 percent. In Yala, 1986 productivity had decreased
by 1.7% to 3,287 kgs due to the drop
in productivity mainly in areas under major irrigation and in reain fed areas. The drop in productivity in areasunder major irrigation and in rainfed areas were nearly 4 percent while the drop in productivity in areas under minor irrigation was marginal (0.5 per cent). The area cultivates in 1986 in creased by 1.6 percent to 895,000 hectare (4.6%) under major irrigation schemes was 198,000 hectares (22%0 under minor irrigation schemes and
287,000 hectares (32%) under rainfed - a CaS.
Issues of fertilizer for the paddy sector in 1986 had increased by 12 percent to 219,000 metric tons in 1986 and this increase was more significant in Yala season than Maha. Total issues of fertilizer in Maha 1986 ina creased by 5 percent to 126,000 metric tons while this increase in Yala 86 was 24 percent to 93,000 metric tons. As total fertilizer issues increased by a higher rate than increase of gross extent sown in both Yala and Maha’86,
fertilizer issues per hectare in the
paddy sector also increased in that year Fertilizer issue per sown hectare was 245 kgs, which was a 11 percent increase over the previous year. Fertilizer issues per Sown hectare in the paddy sector in Maha 86 was 227 kgs and this was 274 kgs in Maha 86. The increase in fertilizer issues in Maha 86 and Yala 86, was 8 percent and 14 percent respectively.
/ESTED, EXTENTSOWN, ISSUE OF FERTILIZER AND
C IN PADDY SECTOR 1984-1986
84. 1984/85 1985/86
3、 Total Maha Yala Total Maha -- Yala Total 浔 1984 84/85 1985 - 1985 85/86 1986 1986
60 2,413 1,751 910 2,661 1,688 900 2,588 146 3,076 3,498 3,343 3,464 3,585 3,287 3,497 ! 6 787 493 270 768 469 - 271 74O 77 886569 305 864. 527, 308 835 34 990 569 312 881 555 340 895 2 95120 75 195 126 93 219
O 176, 83 38 121 1OO 89 189
fariat Central Bank of Ceylor

Page 18
The growth-leading sectors in the economy after 1977 have been mainly paddy, private manufacture, Construction and services. Production of paddy had increased both as a Fesult of the increase in area (16% between 1977 and 1985) and yields (42% between 1977-83 and 1983-85). Considering the growth rates of GDP in selected sectors, it may be observed in the agricultural sector that for paddy the increase was only 2.5 percent for 197077 as against 5.0 percent for 1978-86.
Modern techniques such as more inten
sive use of fertilizer (use of fertilizer in rice production increased by 85% over the eight year period up to 1983-85) and improved seeds in response to better incentives, together with compara
tively favourable Weather conditions, si | were responsible for the increase in
yields. The result was that rice produc
tion grew at a yearly rate of 5 percent
Over 1978-86, bringing down rice imports from over 30 percent of ricè consumption during 1970-73 to about 5 percent in 1984-86. -
There is no doubt that the higher investment in paddy production generally brought in anticipated returns over the eight years after 1977. A major investment in this regard was for agricultural production in the Mahaweli areas. However, returns from the
Inassive capital expenditure since 1978,
have been considered only “modest by the World Bank since the economy has not benefitted, to the extent ex pected, from the resouees ploughed in for agriculture purposes. This situation, however, has resulted mainly from the increased supply of rice in the international market and consequent lowering of international prices thus, the ratio of domestic producer
prices for rice to those of the interna
tional prices are as follows: -
1978 - 87%
1979 - 7.9% 1980 - 92% 1981 - 104%, . 1982 - -11% 1983 - 1 1.4% 1984 - 120% 1985-123% 1986 - 141%
The above table makes it clear that by 1986 domestic prices were well bey Ond international prices.
16
POTATO TURN
Local potato prc than doubled over 't 1979 to 1985. It nearly half a millio
types of. yams and
pot at Oe:S, * thun ma manioc and Sweet Sumed in Sri Lanka ding to an ART su reveals that the a gained such popul
years that it has rest
· production doubling
decade to over 100,
order to meet local d
Increased quantiti consumed by Sri Lar in the urban sector, consumption is obou annum, as against a of about 3 kilogram prices have also me during this period f kg, in 1979 to Rs. 1985.(See table).
CULTIVATED EXT
rea
Year
1979 1980. 1381. 1982 1983 1934. سعد 985;
Source: Minist, Depar
The ARTH Studi potato farming ha relief to hard presse table farmers, who fered mainly due to and low profitability production. When were banned in N businessmen also Ve mercial farming of fused a degree of c which has further in vities in this area.
values in these areas
dously. Currently o

ED INTO A SUCCESSFUL COMMERCIAL CROP
duction has more he six years from S estimated that tons of various
tubers such as S-ala, kiri-ala, otatoes are con
annually, accor
rvey. This survey ien pOtatO -- has arity over these ited in its annual during the last OO metric tons in emand. es of this yam are
kans, particularly
where per Capita t9 kilograms per
national average S. However, retail re than doubled rom RS.6/67 per
15/67 per kg in
are engaged in potato farming and its
related activities.
The total area under potatoes is estimated at over 8,000 hectares. Ba
dulla, Nuwara Eliya and Jaffna districts account for 66, 22 and 11 percent of the area, respectively. There is
a wide variation in the quantity pro
duced per acre, and in the quality of potatoes produced in these areas. Though the climatic conditions do not permit production of the type mostly preferred by consumers, the Jaffna i farmer produces abòut 12 m. t. per
acre: Around 8 m.t. per acre is ob
tained at Nuwara Eliya and 3% m.t.
per acre at Badulla. Potatoes TrO1η
Nuwara Eliya are considered the
highest in quality and they always fetch higher prices at the market compared to Welimada (Badulla) arid
Jaffna varieties. At current market
prices the total potato crop is esti
mated to be worth Over Rs.750 mill
iiOn.
ENT, PRODUCTION AND IMPORTS OF POTATOES (1979-85)
and Extern
Production Imports Ret Prices
(ha) (mt) (mt) (Rs/kg)
4,212 52,468 7,687 6.67 5,217 76,656 11,071 .
4,648 63,385 1,000 ܚ ܝ ܢ
5,702 65,156 -- --- 6,636 82,494 861 12.11
7,912 98.412 214 15:53
8,352 1 18,235 15.67
y of Agriculture and Agricultural Development, tment of Commerce and Central Bank of Sri Lanka.
y indicates that
s brought much i upcountry Vegeguite often suf
depressed prices
of their vegetable
potatO imports
1ay 1967 many nEured into Compotatoes and inapital investment tensified the actiAs a result land
increased tremen
jer 25,00 people
The cost of production of potatoes is considered high, so that the average subsistence farmer finds it diffficult to take to cultivation of this crop. Most of them lease out their lands or plant only a small portion of it. The current cost of production per acre varies between RS. 76,000 at Badulla to about
Rs. 21,000 at Nuwara Eliya. Nearly
half of it goes for seed potatoes. The Nuwara Eliya farmer incurs high expenditure on fertilizer and labour, which is 26 and 24 percent of his cost of production, respectively. This could be one reason, apart from the agro
Econo Mic REVIEW JUNE/JULY - 1987

Page 19
climatic factor, that enables him to produce the best quality tubers. ܡ
The Badulla farmer uses the minimum quantity of fertilizer compared to the other two districts. He also utilizes marginal highland for potatoe cultivation. Thus the productivity of potato lands in this area is generally low. However, it is the Jaffna potatoes that fetch the lowest prices, perhaps due to their poor cooking quality.
The quantum of seed potatoes required i per acre is around 1 metric ton. The total seed requirement of the country could be in the region of 18,000 metric tons. About 4/5 of the seeds are currently produced locally. (Farmers themselves produce about
3/4). The balance is imported. How
ever, government programmes are un
derWay to increás duction. In additio
ments have been Department of A potato seeds, whi
siderable quantity
sumption, while r production. The
search stations at
ac) and Meeillimair most important see
The production Lanka has been str
the interplay of
factors, namely:
(i) A regualr shor mestic Seeds a on imported see
(ii) Government’s
foreign exchan
Building Better Potatores: Research at CIP
- nary adaptability of the potato on his H.M.
S. Beagle voyage in 1836:
the damp forests of the southern islands'
America, the potato has spread to 130
taken to Europe by the Spaniards. In the past 20 years, potato production in deve loping countries has outpaced growth rates
is doubling every 10 to 15 years; every 9 years in East Asia, Southeast Asia and China
toes in the developing World. a
The potato is highly nutritious. It produces more edible energy and protein par hectare than practically any other crop. It is also highly adaptable, thriving in over a doZen different climates in developing countries. Its growth cycle is considerably shorter in the tropics where harvest can begin as early as 50 days after planting; in northern climates an average of at least 150 days is
often required to attain maximum yield.
To helpo exploit the full potential of the
tries has been the task of the International Potato Center (CIP). Based in Lima, Peru, it was established iñ 1971 by the Consultative Group ön international Agricultural Research (CGIAR).
CP tries to bridge the gap in potao research and development capabilities bet
Charles Darwin noticed the extraordi
'It is remarkable that the same plan should be found on the sterile mountains of Central Chile, where a drop of rain does not fall for more than six months, and within
Native to the highland tropics of South
countries since it was first discovered and
of all other major food crops. Consumption
now produce over 240 per cent of all pota
potato as a food crop for developing CQun
ween the tropics ar northern latitude cou ten thrusts and is org ments: taxonomy; : pathology; entomolc and physiology.
The ten research it * Maintenance and
ploited genetic res * Production and di
breeding material Bacterial and fung * Potato virus
integrated pest ma Warm climate pota Cool climate potat Postharvest technic Seed research * Potatoes in deve
Systems
홍
洛
CIP's horizontal
tional programmes : flow of expertise frt directly to other cou ple, has been the cas Viet Nam, where farr of facilities and trai
time applying tissue (
commercial basis to g ria for seed and table perience was shared Asian countries thro workshop in 1984
Farmer-back-to-far
CIP's experience: and dissemination of gy led to the formu back-to-farmer' resea
on the basic philos
ECON QM I C REVIEW JUin E/JULY- 1987

e Seed potato > proin, successful expericarried out by the
griculture to plant
ch Could Save a con
of potatoes for con
educing the cost of Department's reSeetha Eliya (467 na (435 ac) are the 2d producing farms.
of potatoes in Sri 'ongly influenced by two countervailing
tage of quality dond the dependence ds,
decision to reduce ge expenditure on
imports through increased seed production. . - Considering that an average potato farmer spends nearly 50 percent of his production costs on seeds, it is not difficult to understand the gravity of the problem. The agitation of the potato farmer has therefore been justifiable. Almost every season the problem of seed potatoes surfaces and the media takes it up as an important issue. However, remedial action seems fo be quite slow. The logistics involved in procuring seed potatoes are entangled in a web of problems. Currently most of these problems are cirtical for both the cost of production and the difficulties experienced in procuring seed potatoes. -
Most of the imported seeds are
di subtrọpics and the : intries. Its research has anized in seven departbreeding and genetics: 2gy and nematology,
hrusts are:
utilization of unex
Ou s'éces −
stribution of advanced
at diseases
nagement ato production i o production blogy
}loping country food
relationship with nahas also resulted in a om these programmes ntries. This, for exame of the Dalat area of ners - With a minimum ining-are for the first ulture techniques on a enerate planting mate: potato crops. This exwith eight Southeast ough a CP-sponsored
mer model
so in the development seed storage technololation of the 'farmerrch model, VAvhich rests ophy that successful
household, and community. The model is
(COOPERATION SOUTH)
adaptive interdisciplinary research must BEGIN and END with the farmer, farm
now being looked at with interest by agricultural policy makers and development specialists working in other areas.
Stressing participatory research, it inolves at least three distinct groups, each with their own perception of reality: social scientists, technologists, and farmers or other clients. Each view of reality can be considered true in and of itself, based on the group or individual's relationship to the situation at hand.
Technologists are under strong presssure oy donors, administrations and colleagues to produce a better technology that works and is adopted by farmers or consumers. Social Scientists play a cultura broker's role, articulating their understanding of the farmers' situation to colleagues from biological sciences. Completing the triangle is the farmer, the one faciñg the problem but who does not receive a guaranteed monthly check to 'solve farmers' problery's'.
Farmers live in both a teçhnical ånd a
social world based on agriculture; researchers simply study the worlds but do not have to live by the consequences of farm decisions.
17.

Page 20
issued to Seed potato producers by
the Department of Agriculture. The small farmers appear to be feeling the
impact of this problems most. Their
frustrations are generally directed to
wards influential farmers who get the
best of benefits. There are also small farmers who obtain their own requirements from the Department and sell theri seed potato to large Scale farmers. Many of them never engage in
potatoa cultivation as such, but contribute to the distortion of the entire dis
tribution system. ܫ
In recent years the average net income per acre was: Nuwara Eliya
Rs.31,000, Badulla Rs. 13,400 and
Jaffna Rs.22,200. Hence, though the cost of production was high, potato, has become one of the most profitable agricultural crops in the country.
Over 90 percent of the potatoes
produced in the country are traded by the private sector. Colombo and sub
urbs being the major markets, most of
the produce is sent to commission
agents in the Pettah.
According to the seasonal price in
dex, there is a considerable seasonal
fluctuation. potato prices are low in February and March and thereafter is September, October, and November.
The prices are highest in June and July
at which time there is also a vegetable
scarcity. Retail prices have varied, according to supply position, between
RS. 15 and Rs. 20 per kg in recent yearS. |- --
Caution would have to be exercised when increasing potato cultivation without giving due consideration to existing demand. Over production may depress prices and adversely af. fect the farmer.
It is necessary for some organisation to educate farmers on post harvest activities, which should begin with the correct maturing time that fetches
the best price for potatoes. Another important aspect is increasing of sto
rage facilities, particularly in areas such as Nuwara Eliya and Wellimada.
This needs more research, particularly
in the area of food preparation and technology, which could help the farmer who could secure better prices by staggering supplies to the market and benefit from high prices during lean periods.
• : ` S.L.T.
18
FOREIGN NEWS
UNCTAD VII
A full UN Conf Development cor after four years. T these major sessio sentatives of 168 gather, are being from July 9-13. nued to pursue it moting internation ly that of develo
over two decades.
major conference and Raul Prebisch nary plan for mul in a report titled Trade Policy for D gave a new perspe international econ UN activities, ne launched in favour in the spheres of ment.
In the 1970's t teral co-operation lopment grew eve Sri Lanka’s Gama tary General, kep that “although th hensive agreement problems or on th decisions, these St trated the politica tional community key issues'. From Manila in 1979 a this NOrth South unabated with m from the Integra Commodities initia of the Fourth Ses the Economic R. ted on the occas UNCTAD Sessions along but not conc - of 77 demands anc finally arrived at is reconvenes..... By UNCTAD VIII, it covert support w coming; and in C UNCTAD’s Trade Board adopted a
 

erence on Trade and
venes once again .
itled UNCTAD VII,
ns, at which repremember states will
staged in Geneva
JNCTAD has conti
s objectives of proLal trade, particularping countries, for Ever since the first took place in 1964 produced his visiozilateral cooperation “Towards a New evelopment, which tive to the fields of
omic relations and
iw initiatives were of the Third World trade and develop
he need for multilain trade and deve1n more urgent and ni Corea, as Secret up the conviction ere was no compreon the substance of e implementation of essions still demonswill of the internato negotiate certain Nairobi in 1976 to ld Belgrade in 1983 Dialogue continued uch hope springing ted Programme for ited around the time sions in 1976. But as eview' has commenion of each of the “The North will go pede what the Group i the only agreement that the conference
1987, and appears that even
as not fully forth
Dctober 1986 when ; and Development decision containing
the provisional agenda for UNCTAD
VIII there was no unanimity. Prior to
the adoption of this decision, the representative of United States requested that the Board vote on it and an
nounced his delegation's negative vote
on the agenda. This position of the US delegation was duly recorded.
The provisional agenda set out the programme for UNCTAD VIII in the following terms:
*Revitalizing development, growth and international trade, in a more predictable and supportive environment, through multilateral co-operation: Assessment of relevant economic trends and of global change, and appropriate formulation of policies and
measures, addressing key issues in the
following interrelated areas: (a) reSources for development, including filnancial, and related monetary questions; (b) commodities; (c) international trade; (d) problems of the least developed countries'
The current crisis in each of these four main areas was Summed up in UNCTAD reports as follows:
Restructuring Processes
In developing countries the policy of adjustment is more clearly connec
ited with the Overall development pro
cess and seizing the opportunities for development which changes in the world economic environment offer.
Unlike the developed market-economy countries or socialist countries, develo
ping countries do not have any collectively axcepted comprehensive guidelines on industrial development strategy and structural adjustment policies beyond the broad aims of securing greater access to the external markets
and increasing their self reliance.
The severity of the problems facing
EcoNoMic REVIEW June/July-1987

Page 21
many developing countries have sought the assistance of external inter
national agencies in meeting their immediate balance-of-payments needs. This assistance has been rendered on conditional terms, and the "conditionality’ attached to the lending has shaped the nature nad content of the adjustment programmes adopted by the recipient countries. The common thread running through the various structural adjustment programmes is the premise that a property functioning market economy experiences few market failures and that existing market imperfections are mainly due to policy interventions.
Outlook for Commodities
On the whole there has been a growing maladjustment, exacerbated by the accumulation of stocks, as between demand and supply of primary commodities to which both developing and developed countries have contributed.
In the short terms, the expected level of economic activity in key markets provides the strongest determinant of commodity prospects. Most commodity prices are likely to experience further downward pressure in view of the expected continued slow growth rate of developed countries as well as other factors. If the World Bank's estimate of 2 percent GDP growth in 1987 for the industrialized
countries is borne Out, the level of economic activity is likely to have a dowanward impact upon the prices of all primary commodities, except gold, silver and tin. Longer term commodity prospects are much more strongly in fluenced by structural factors on both the demand and the supply sides.
The Debt Question
The emergence of widespread inability of developing countries to meet debt service as originally scheduled has been the salient characteristic of international finance in the 1980s. For debtor countries, growth and develop
ECONOMIC PREVIEW - JUNE/JULY - 19R7
ment prospects in
future and the lon portantly influenc success in address and the characteri deployed to that countries, the recc markets, the heal mestic financial ir haps of the bank depend on the abi ble solutions. Rare stakes in resolving of developing cou for all concerned.
Least Developed C.
Among the di the least develope with the lo West lev come in the wor handicapped and i lop their domesti ensure adequate their population. per capita is slightl which is less than of the developing and only about 2 the developed mall tries. A high propc lation liveS in con sistence. Average tivity is less than o developing count small proportion O assured irrigation most least develo from One or mor phical or climat such as land-locke remote insularity sertification (22) a disasters such as ( earthquakes (9 in
The above-me useful as they are Socio-economic co vail in LDCs, mer. face of a problem profound structur asymmetries in int relations. Both of tate against the a tries to effective nomic potential a mum adequate sta

both the immediate er term will be imd by the degree of ng debt problems, tics of the measures
end. For creditor tery of theri export h of individual dostitutions, and perng system itself all ity to arrive at vialy, if ever, have the financial difficulties ntries been so high
puntries
2veloping countries i countries (LDCs), els of per capital inld, are particularly |l-equipped to deve: economies and to iving standards for Their average GDP y higher than £ 200, one quarter of that countries as a whole per cent of that of ket-economy counortion of their popuditions of mere subagricultural producne half that of other ries. Only a very f cultivated land has facilities. Moreover, ped countires suffer e important geograological handicaps, liness (15 countreis), 8), drought and dend high exposure to yclones, floods and 984-1985 alone).
ntioned indicators, for ascertaining the inditions which pre1y illustrate the surwhich is rooted in all handcaps and in ernational economic these features milipility of these counexploit their econd thus attain minihdards of living.
COMMON FUND
USSR’s joining brings closer Fund's 'entry into force'
On July 13, the USSR announced that it Would "join' the Common Fund and sign it during the current UNCTAD VI session. Ratification by the USSR would bring the total percentage of the Fund's Directly Contributed Capital to 64.84 percent. If the BYellorussian Soviet Socialist Republic and the Ukarinian Soviet Socialist Republic followed suit, this would rise to 85.27 perCent, leaving 1,4 percent to be met. This decision means that the long-awaited entry into force of the Common Fund Agreement is now within immediate reach.
The Agreement Establishing the Common Fund for Commodities will enter into force (i) after it has been ratified by a minimum of 90 States accounting for at least two thirds of the Fund's Directly Contributed Capital of $ US 470 million; and (ii) after not less than 50 percent of the target of $US 280 million for pledges of Voluntary contributions to the Second Account of the Fund has been met.
The pledges of voluntary contribution of S 256 million for the 'second window' have been lying idle pending entry into force of the Agreement. The Common Fund emerged from UNCTAD IV in Nairobi in 1986 and has long been regarded as a key element of the UNCTAD's Integrated Pregramme for Commodities.
By JUly 14, 1987, the Agreement had been ratified by 94 States accounting for 59.06 percetin of the Fund's capital ($ US 277.59 million) and the total of announced pledges of voluntary contributions to the Second Account amounted to about S US 256 million. Thus, there remained only one condition for entry into force which has not yet been fulfilled, namely, that relating to the two-thirds share of the Fund's capifai.
For most developing countries, including the east developed countries, one long-term development objective has been to diversify their economies so as to reduce their economic dependence on the production and export of primary commodities. While pursuing this aim, they have sought to improve their export earnings from commodities and to protect their economies from the instabiity of commodity markets and from adverse terms of trade for commodities. The Integrated Programme for Commodities (PC) was designed to respond to these concerns and to help commodity dependent developing countries to secure sufficient resources for the diversification and development of their economies. 19

Page 22
COCONUT
Decline in Production and Earnings in first quarter of 15
The continuous increase in coconut production over 1985 and 1986 was reverses in the first quarter of 1987, with the drought of the latter part of 1986 and early 1987 in the coconut producing areas taking effect. Coconut production in 1986 at 3,041 million nuts was the highest level of production for any year on recored; but coconut oil production came down to 24,055 m.t. in the Jan - March 1987 period as against 45,070 m. t. in the same period in 1986. Desiccated Coconut (DC) however showed a slight increase in production to 14,059 m.t. in 1987 as against 13,022 m. t. in the 1986 period.
with exports mt. in the 12,883 m.t. ii nings from DC and the averag ric ton went 1987 period a mt. in the 198 COCOnut oi heavy fall dur period, both alue. Average showed a subs larly in cocor went up from the 1986 peric in the 1987 pe
EXPORT OF COCONUT PRODUCTS JAN-MARCH 1986 and 1987 - VOLUME Al
VOLUME (MT) PRODUCT Jan/Mar Jan/Mar 7,
1986 1987 change 1986
Coconut Oil 34,093 8,481 -75 326. Desiccated Coconut 12,883 14,240 4-10 199 ( Copra 1,754 2,858 +66 20.6 Fresh Nuts & Seed Nuts 3.4 mn 3.8 mm | +23 3.9 Coconut Poonac 1,500 5,500 -266 . Coconut Cream 47 77 ||+63 1.1 Sub Total 372.39 182.60 -51 560.5 Kerne Products in mn eqwnt.
Sub Total Non kerne! products 17O. TOTAL VALUE OF ALL PRODUCTS 731.
in the first quarter of 1987 the volume of kernel products exported fell by as much as 51 percent over that of the same period in 1986. In million nuts equivalent the volume was 372.9 mn in Jan-March 1986 as against 182.6 mn in Jan - March 1987. The F.O.B. value of exports, however, dropped by only 27 percent from Rs 560.5 mn in the first quarter of 1986 to Rs 405.8 mn in the same period of 1987. But average F.O.B. values (per nut equivalent) were higher in the 1987 period, averaging Rs 2/22 in 1987 as against Rs 1/50 in 1986.
Highest earnings came in from DC,
20
continued to
COCOnut Oi! in buyers of De West Germany,
In non-kerr there was 53 port earnings, Rs 17O min ir period to Rs period. Yet, to all products in percent less th down from Rs 1986 to Rs 6
 
 

87
amounting to 14,240 987 period as against the 1986 period. Earwere 28 percent higher e F.O.B. value per metip to Rs 17,881 in the s against Rs 15,451 per 6 period.
exports experienced a Ing the Jan-March 1987 n terms of Volume and F.O.B. prices, however, antial increases; particuut oil in drums, which Rs 10,420 per m.t. in id to Rs 14724 per m.t. riod. U.S.A. and Canada
NDİ VALUE
VOLUME(SLRS) Mar Jan/Mar 2,
1987 change
38 94,095.00-71 D7 254.54 +28
S1 23.87 --19
34 14.23 ||+59 34 16.14 +320 6 2.02 +74 O 405.80 || +27
52 261.66 十G3
O2 667.46 -9
pe the major buyers of
| 1987 while the main
siccated Coconut were
U.K. and Holland.
el products, hoWever, percent increase in exwhich went up from the Jan-March 1986 261.7 m n in the 1987 tal value of exports of the 1987 was almost 10 an 1986 period, going 731 m n in Jan-March 567 m n in 1987.
The coconut industry revived from a situation of low yields, heavy scarcity and poor exports during 1984 to prosper in the next two years at levels almost un paralleled in the annals of the coconut industry. Coconut production increased 52 percent in 1985 and 56 percent in 1986 as compared to that of 1984; while nut production went over the 3 billion mark in 1986. This increase in coconut supplies depressed price levels, though it also stimulated greater activity in the coconut processing and export sectors.
Meanwhile, earnings on exports of coconut production reached an all time high of Rs.3.2 billion in 1985;although it dropped 13 percent in 1986, despite the greater Volume exported. This glut in supplies that commenced early in 1985 had been a global phenomenon and it engulfed markets for almost the entire range of oil and oil seeds, plunging price levels to a historical low in the international market in mid 1986. -
During 1986 the government took certain fiscal measures to increase the competitive position of the industry and stimulate exports, such as reducing the duties payable on the export of copra and desiccated coconut and suspending the cess levies payable on coconut products.
Prospects for Sri Lanka's coconut industry in 1987, however, appeared gloomy once again, due to the severe drought conditions that coconut plantations faced in the latter part of 1986, and in the early months of 1987. The Marketing Division of the Coconut Development Authority has forecast that as a result of the severe drought conditions 'the coconut industry is likely to face a severe supply situation in the months ahead and again in 1988. Adverse weather conditions apart, several other coconut producing countries are entering the export market in a big Way and this will be a major factor to contend with for Sri Lanka,inspite of the excellent quality of our products'.
G.J.
ECONOMIC ReVIEW! JUNE/JULY - ig87

Page 23
FEATUREs
BIOTECHNOLOGY - Need for a Rational Policy
Biotechnology has come to be regarded as the fastest growing industry in the world today. Its new inventions, according to India's Praful Bidwai, are "perhaps the greatest technological advances since the discovery of fire, and could totally transform major indus
tries, agriculture, livestockbreeding and
forestry'. The term 'biotechnology' covers a number of powerful techniques, many of them only some years old, by means of which life-forms can be manipulated and altered at the most basic level so that they develop some specific properties,
In an overview of the entire process and current developments, carried in a recent issue of the Times of India', Bidwai explained that today one could take; genes (the basic material in an organism that contains the code for its reproduction and growth), split and splice them, graft them on to another organism and thus 'manufacture' a new life-formsay a virus.Or you can clone a particular kind of super-cereal or super-vegetable with very high yields by using certain simple laboratory techniques, and then imbue it with such properties as you like- for instance, drought and pest resistance or, equally, pesticide tolerance. Or you can make bacteria covert garbage directly into alcohol and to transform, say, metallic ores into metals. You can make powerful vaccines using ultracheap fermentation techniques. Or you can make bio-fertilisers, bio-pesticides and plant growth nutrients that will dramatically raise crop and forestry yields. And you can "fabricate' supercows which efficiently digest any sort
of muck and yield three times as much
milk as the ordianry Indian baffalo.
All this is no longer in the realm of theory or basic science. It is already being commercialised. The bio-industries have by now absorbed a huge investment of the order of $ 3 billion to
" 4 bilion, or Rs. 4,000 crores to 5,000
ECONOMIC reView JUNE/Ju Y- 1987
COncern
crores in research alone.
They are now products on the n single breakthroug by the dramatic en lin more than a yea being followed up products, from see des to drugs, fruits : Biotechnology i business dependent ture capital. The \ biotechnology firm bought up indeed been purchased by in the agrochemic cuticals and oil indu There are growi that just as these sc rations earlier mast ised the technolog pharmaceuticals, fibres and petroch now absorbing the t culture, monoclon hybridomas, embry transfer and gene-sp
Bogeve Declaration
Earlier this year tists from nineteen met in Bogève Fra about t impact of new bio-t Health and Agricul World. They declar logy was a global not be assigned such tive, negative or || other technology,
" , 1linked to the socio
created and used, cially just or unji Therefore, we concl world this most pos
logy is more likely
rests of the rich and needs of the poor air
We fully recogni biotechnology to ir
 
 

and development
putting out their larket. The biggest h was represented try òf human insuir ago. That is now by a host of other ds and i bio-pesticiand vegetables. s no longer small : on highrisk venWest's 200 to 300
is are now being
most have already arge multinationals als, seeds, pharma|stry. ng fears, however, cience-based corpoered and monopoy of making dyes, lastics, synthetic emicals, they are echniques of tissue at antibodies and D manipulation and licing. .
28 leading sciendifferent countries nce and expressed he socio-economic echniques on Basic ture in the Third ed that biotechnoissue, which could attributes as posineutral. “Like: any it is inextricably sty in which it is and will be as soist as its milieu. ude that in today’s werful new technoto serve the intepowerful than the d powerless.
te the potential of -
prove the quality
of humanity. But it is important to emphasize the risks and hazards associated with biotechnology, including serious and possibly irreversible health, safety, environmental and socioeconomic consequences, as well as the use
of such technology in biological warfare.
In agriculture, for instance, while biotechnology may promise toincrease production and reduce costs, it is more likely to accentuate inequalities in the farm population, aggravate the problem of genetic erosion and uniformity, undermine life-support systems, increase the vulnerability and depen
dence of farmers and further concen
trate the power of transnational agribusiness. -
In health, for instance, biotechnology promises more effective diagnostic tools and new ways of preventing and curing diseases. However, the pharmaceutical industry is more likely to focus on the most profitable commercial opportunities and divert attention from basic health requirements'.
This international forum in Bogeve also resolved that at a National level 'a dialogue be established to determine the real needs of society and the main requirements for a national biotechno
logy strategy based on these needs; the socioeconomic and environmental
implications of such a strategy be fully considered; the regulatory requirements for the safe testing and introduction of the technology be established and stringently enforced; the control over the technology be assigned to the public sector; and that the monopolization of the technology
by private interests be resisted.
Plant Genetic Resources centre
In Sri Lanka, the setting up of a modern national Plant Genetic Resour
ces : Centre, under the Department of - Agriculture, is a positive step in this
direction. Local and exotic germplasm has been exploited to improve rice, tea, rubber and coconut, but the same has not occured for other crops. Sri Lanka's rich diversity of genetic resources are endangered by rural and urban development, pollution and over exploitation. -
21

Page 24
Valuable material in our genetic endowment, including medicinal plants and herbs, has undoubtedly been lost. It is estimated that a collection of cultivated and wild plaint species in Sri Lanka would yield about 25,000 species, varieties, clones, strains and ecotypes. Any delay in collection will mean permanent loss of priceless material.
The object. Genetic Resou efassure and liv, tic resources b and utilizing ou
resources will
programmes t cultivated plar agricultural pr
酱
Preserving Sri Lanka's plant genetic resources
S.D. G. Jayawardena
Botanical & National Coordinator Plant Genetic Resources Program
Since the dawn of civilization, Sri Lankan farmers have created a multitude of crop forms and a remarkable genetic diversity of crop species. We are heir to these traditional cultivars, along with their wild and weedy relatives.
While our cultural artifacts have museum value, crop genetic resources are invaluable to agricultural research and development. These genetic materials are the building blocks of our varietal development programmes.
During the last twenty years the outlook on the production potential of world agriculture has changed radically due to the introduction and distribution of modern high yielding cultivars. Many countries in Asia, including Sri Lanka, have increased their capacity to produce rice to a level far exceeding that achieved during the preceding 2000 years. -
However these modern crop cultivars are vulnerable to pests and diseases, and possess limited adaptation to unstable environments. Studies made on the genetic ancestry of these cultiwars have revealed extensive reliance on a few parental materials.
In most of these cases the material lineage has also been traced to a very narrow cytoplasmic source. To rectify this the genetic base of modern cultivars needs to be broadened by incorporating genes from diverse germplasm SouTCGS.
Available crop genetic resources are fast dwindling due to wide acceptance
of modern hybrid varieties. Hence, the
collection, conservation and evaluation
of crop germplasm has been identified
22
as vital to futu Sri Lanka.
Conventiona cannot produc in crop yields. Ses are possible cation of bio we need to dev search base for technological such as in vitro
Progress in of plant breed by inadequate The need for strengthen Sri )
SOUTCeS pTOgfa technological re
Discussions Ambassador of a project propc velop appropri was submitted Japan for its co The establish tic Resources ( This center will a national net serve, evaluate plasm and inf built and equip million and is Government of Investments are justifiable materials are fu in varietal deve The centre aim oriented strate conservation a with appropriat
1:1θS.
The essentia centre are low rage depositoric
 
 

ve in setting up this rces Centre is also to st in Sri Lanka's geney preserving, evaluating
r indigenous germplasm.
These important be a basis for breeding ) protect and improve ts, sustain and improve oduction, forestry and
re crop improvement in
tl breeding techniques e any further advances Additional yield increaonly through the applitechnology. Therefore, 'elop an appropriate rethe application of biomethods to breeding, culture. biotechnological aspects ing has been hampered infrastructural facilities. external funding to Lanka's crop genetic remme and initiate bio2search was recognized. were initiated with the Japan in Sri Lanka and sal for assistance to detate research facilities to the Government of nsideration. ament of a Plant GeneDentre is now a reality. function as the hub of work to colect, conand disseminate germormation. It is being ped at a cost of Rs. 400 entirely funded by the Japan. ܚܠ in genetic conservation only if the conserved lly evaluated and used slopment programmes. s at developing a usergy so as to integrate nd evaluation aspects e utilization program
1 components of the temperature seed sto
2s, laboratories for in,
dependent industries, and maintain a buffer against harmful evironmental changes.
The need for preserving plant genes is more fully discussed in the accompanying note by the Coordinator of this programme locally, while two further discussions on the international situation are carried on pages 23-25.
vitro preservation of vegetatively propogated crops, biotechnology, evaluation, and data management. Appropriate green house, screen house and field facilities will be established. Ancillary components such as a conference hall, library etc. are also included.
The major activities of this centre aTe:
1. Exploration and acquisition of crop
genetic resources, Conservation of germplasm, 3. Characterization of germplasm using taxonomic, biochemical and other techniques, 4. Multidisciplinary evaluations for
identification of genetic traits, 5. Documentation of genetic resource
information, 6. Exchange of germplasm and infor
mation, and 7. Integration of emerging biotechnologies with conventional breeding in crop improvemnt programmes. To ensure effective functioning of the center, a technical collaboration programme with Japanese scientists is envisaged. The assemblage of germplasm is already underway.
Over 2000 rice accessions have been collected and were duplicated at the International Rice Research Institute. The collection and characterization of germplasm of other field crops is currecntly being carried out with IBPGR/ FAO assistance.
The implementation of this project will help Sri Lanka preserve its valuable plant gentic resources and develop suitable technology for germplasm enhancement.
Through these measures it is intended to generate the most important technology in agriculture, the production and release of appropriate crop varieties tailored to farmers' needs.
2
EconoMic REVIEW June/July-1987

Page 25
THIRD WORLD DEMANDSJUSTICE OVER SEEDS
Andy Crump
Third World nations are beginning
to press for 'farmer's rights' over
their own genetic resources - in order to deflect a growing control by the industrialised world over the multitude of Third World seeds and crop varieties. Or so it emerged at a recent meeting of the Food and Agriculture Organisation (FAO) Commission on Plant Genetic Resources, which recommended the establishment of a new international Fund for Genetic Resources to helpo deal with the problem.
The demand is a simple matter of justice, Third World representatives argue. Third World farmers, who have selected and developed crops through continual use, should have similar rights to those enjoyed by companies and industriaised nations which devetop new varieties rapidly through biotechnology, they claim.
The lack of such rights, together with fears of exploitation and of the
unpredictable impacts of biotechnolo
gy, have caused some Third World na
tions to shut their doors to any kind
of trade in economically important seeds or genetic material. But resources from the proposed new International Fund should help by allowing gene banks and conservation programmes to be established, especially in the Third World, with rights and control vested in the South.
According to the FAO meeting, the proposed fund which should be set up at the November meeting of the FAO general assembly would raise fihoney
through voluntary donations from
governments, non-governmental organisations and individuals. The possibiity is also being looked at of levying a tax on the seed trade, which is dominated by the rich North.
The problem the fund will tackle is becoming increasingly urgent, and has polarised the North and South. Most developing countries believe that the industrialised Northern nations have
abused the unrestricted access to the
ECONOMIC REVIEW JUNIE/ JJ LY- "1987
ඉංෂ
genetic resources they have traditior - the advent of bij have been growing companies in the N tic material collect countries for bree with the resultant being solid back te tions at significant
The political vul ternational Rice {{RR) in the Pr worred Third World RR ooks after rice cultivars - ou" germplasm collecti in the United Stat gan administration the export of germ
and Libya, not on
political grounds.
Three years ago Undertaking on sources was adopt ting. Proposed by World countries, it unanimously. The that germplasm, seeds, should be co therefore freely a motion Was passe States being virtua sing opposition.
In November 1 rai key developing Brazil, Argentina earn large sums fr gan to express th Undertaking, and vision.
The concerns fo cal collection an plasm, coordinated nal Board on Plan (BPGR). The BP ted the collection in 50 countries, a tional Committee: plasm collection in To date, devete
 

of the South that ally enjoyed. With otechnology, fears g that commercial orth will use geneed from developing eding programmės, 'improved varieties } the Southern na
orofit. nerability of the InResearch Institute hilippines has also leaders. Currently, 50% of the world's t much of its rice on is actually held es. There, the Reahas already barred plasm to Nicaragua commercial but on
, the 'international
Plant Genetic Reed at an FAO mee
a group of Third was adopted ai most resolution proposed including patented bmmon heritage and tailable to all. The d with the United tly alone in expres
985, however, sewecountries such as and India, which
om their crops, beeir doubts over the
he open access pro
cused on the physi
d storage of germi by the Internatiot Genetic Resources
G R has so far initia
of genetic resources nd has organised na
s to oversee germ
25 others.
pping countries have
supplied 91% of MPGR's material. But the Third World currently holds less than one-third of all known genetic stocks. This is despite the fact that 21 of the International Board's 43 plant gene banks are actually sited in
the Third World.
Germplasm held under the
|BPGER's guidance is stored in gene banks owned by commercial companies or nationali governments. The FAO currently furnishes the Board's administration, but a network of international centres, known as the Consultative Group on international Agricultural Research (CGIAR), actually provides the Board's funding and technical policy. -
Third World nations have little representation or influence on the IBPGR, and have consequently been urging the FAO to take more direct control of the Board, in order to pro
tect their interests.
Yet the question of who will have
control over global gene banks is far from being resolved, particularly to the satisfaction of Third World countries.
in Asia, Indonesia, Thailand and the Philipines have already established their own national agricultural biotechnology programmes,and the International Rice Research Institute (IRRI) has recently created an 'international Biofertilizer Germplasm Conservation Centre' at its Philippines headquarters. Promising microbial sources of plant nutrients will be ewaluated, stored and according to IRR - made available to researchers around the word from this centre.
These isolated initiatives highlight the need for a proper, lasting solution to the problem. A successfe outcome wil i probably need to be based upon a new control mechanism for defining rights over global genetic material. The proposed Fund for Genetic Resources may provide the basis for such a mechanism. PANOS FEATURES a Andy Crump is a freelance science and development writer. He is currently acting as assistant editor, Panos Fea
fii reS.
23.

Page 26
-
DIFFERENT COUNTRIES, DIFFERENT NEEDS
IDRC's view of plant breeders' rights
Over the years different forms of patent and copyright, legislation have been enacted to protect the products of plant breeders' ingeunity and innoVation.
The opponents of plant breeders' rights' rights (PBR) claim that whatever conventional methods of crossing,
propagation, and selection are used, all
of the genes involved occured naturalİy and are therefore the common heritage of al mankind.
In 1983 a majority of the developing country members of the UN Food and Agriculture Organization (FAO) supported a resolution calling for worldwide access to al II. sources of germ plasm. (Germ plasm is a general term referring to any hereditary material including seeds, cuttings, whole plants, or cell cultures that can be used on multiply an organism). The developing countries claim correctly that most of the world's germ plasm comes from their territories. It is a fact that few important edible crops are indigenous to North America for example, blueberry, Cranberry, Jerusalem artichoke, pecan, and sunflower.
An added complication lies in possible future interventions by genetic engineers and other biotechnologists. Their business, broadly speaking, is to juggle the genetic makeup of living organisms. By transferring genes, they confer upon the recipient organism desirable traits that it does not naturally
OsseSS.
Biotechnology companies now appear to be seeking an extension of pro
tective legislatic that an organisr troduction of a anything found
fore as eligible
other unnatural
THey have gaine granted to a maize genotype
technology. So Concern over Wh vidual genes, as into which they duced be come
Free Exchange o
it would be actment of plan to restrict the change of germ regions, in whic food crops orig deprived of acce: and planting na would be advant hensive and defi ections a te ret distributea unde national institut national Board sources (BPGF tions coud be governments.
it is hoped ties, particular germ plasm inc countries, Will available to tho relevant to lice
PBR CGIAR FAO IARCs
IBPGR UPOV IDRC
-
-
-
ACRONYMS
Plant Breeders Rights Consultative Group on International Ag Food and Agriculture Organization
International Agricultural Research ( the CGIAR system International Board for Plant Genetic R Union for the Protection of New Variet International Development Research C
24

n. Their argument is modified by the inforeign gene is unlike n nature, and is therefor a patent as any product of invention. d hope from a patent ompany for a novel produced through biohere is now the added at will happen if indiwel as the plant life are artificially intropatentable.
f Germ. Plasam
unfortunate if the enbreeders' rights Were free international explasm. The developing h most of the World's inated, should not be Ss to essential breeding iterials. To this end it tageous if the comprenitive germ plasm coained, protected, and er the auspices of interions such as the Interfor Plant Genetic ReR). Subsidiary collec
retained by national
that al released Variey those derived from ligenous to developing
also be made freely se countries. The issues nced varieties are con
ricultural Research
entres belonging to
! €SOUTC£S ies Of Plantis entre, Canada.
plex and may call for revisions to international agreements such as the re
gistration legislation covered by the Union for the Protection of New Varieties of Plants (UPOV), adopted by European countries in 1961.
Under the UPOV agreement, samples of released varieties can be made available for breeding, even when not available, for multiplication. However, as breeding shifts to the private sector as a result of PBR, ther is a danger that advanced lines and varieties with potential as parental material in developing counties will increasingly be ocked up. Clearly this should be avoided. The continued and strong involvemetn of the public sector in plant breeding, even in countries that adopt PBR, may be one of the best ways to ensure free access to genetic resources.
BPGR remains the most effective mechanism for coordinating the international collection and protection of germ plasm.
The following paragraphs cite a number of plant breeding issues that seem particularly important to DRC's Board of Governors and management.
2.
Appropriate for Some
The adoption of PBR by developing countries is a matter of individual choice. PBR are probably appropriate for some countries and could help simulate plant breeding activities with clear advantages to local farmers. In other countries, PBR might only exacerbate an existing situation of disad
Vantages. -
Development agencies can help by providing impartial information on the advantages and disadvantages of PBR. Developing countries must not be pressured into establishing PBR by UPOV signatories, transnational companies, or others.
In countries with strong indigenous plant breeding programs, there may be clear advantages in adopting PBR. Indeed, several have already done so. In
such cases, it is the policy of DRC to
cooperate, while at the same time stressing the importance of continued public sector plant breeding.
ECONOMIC REVIEW JUNE/JULY- 1987

Page 27
Some countries have weak plant breeding programs. The scientists may be poorly paid, the working locations isolated, and the facilities inadequate. in such cases it is DRC's policy to support the establishment and strengthening of national agricultural research systems. In such countries there are few commercial opportunities for transnational or private companies and the PBR issue hardly arises.
A third group of countries lies somewhere in between. Public sector breeding has some strength and market prospects amy interest private com
panies. If PBR are adopted in such si
tuations, the most productive policy may be to apply the legislation so that both the public and private sectors have an equal opportunity of benefiting. This would encourage greater financial support and increase the amount of plant breeding. The private sector may play a valuable role in establishing good breeding and seed multiplication enterprises, and indeed may be attracted to do so without PBR legislation. However, care must be taken to ensure that the private sector does not come to dominate breeding efforts. Opportunities for abuse abound. The importance of maintaining a strong public sector is even grater than for developed countries.
There can be no possibility of PB R in any country until ther is an organized seed industry with rigorous standards for seed multiplication, storage,
dressing, packing, and distribution. Generally, such an industry is best han- -
died by private enterprise. Governments, however, must ensure the maintenance of standards, certification of the seed crop in the field, and inspec
tion of seed samples for impurities,
germination, pests, and diseases.
Donor agencies need to assist deveoping countries in seed multiplication, seed licencing, and inspection services, as well as in the training of staff for these specific purposes.
Membrship in UPOV makes good sense for the developed world. It ensures high standards of testing for per
formance and quality, thus providing
ECONOMIC REVIEW JUNE/JULY - 1987
in 1930 the U. duced asexually th; tried protection from one generatio terogeneous Congre parts an edible PPA plant asexually. Ot
(£SS
| in Europe, faoir i Only registered vari 136 tieġ li jriiors for registration regislati In 1970, the U. tection to sexually sing and selection awards protection been awarded unde
harvest as planting si ல்ப்ல்ம்ல்
for a reputable at tional seed trade. ges free interchange rials among its meno For many de however, members may be inappropr have the necessar carry out extensive and seed. In addit Come vulnerable transnational como tions of joining U haustively studied ment considers met
Cgiar System
The number o' tries able to legisl manage PBR is si majority, there wil on seed movemen Seed materials will ly available from t
Some observes semifinished cultiv are susceptible to countries with PE therefore need to cribed, and the
publicized.
Appropriate ag made with goverr tries concerned. the dangers assoc priation may be that join UPOV.
 
 

Congress passed the Pan Paren ※ is, through cuttings and grafts ratner han fres vegetatively propagated clones since they are gen to the next in contrast, the progeny of sexual crosses are widely he also excluded plants such as potatoes, whose asexually reproducing forbids breeders other than the patentor to reproduce the partented 2r nav høWevet se the protected variety as a ప్రకళ కళ కళ:
than 60 years ago France registered seeds by variety and breeder. ties could be sold, thus establishing du facto plant bridders' rights in the Protection of New varieties of Plants (UPOV) standardized such is throughout Europe 羲 羲
Plant variety Protection Act (PvPA) extended a form of patent pro
produced plants. This recognized the fact that through diligent cros. feeders could produce identifible, uniform, and stable varieties PvPA artificates for 18 years Kore than 1 600 protection esertificares nave
si Congress res
PvPA. The Act does not prevent a farmer using some of this year's
ềđ:ềằềầềxt:ềềằềồằ:
d reliable internaPOV also encoura
of registered matebers. eloping countries, hip in the union ate. Few countries y trained staff to
testing of varieties ion, they could beto exploitation by janies. The implicaPOV should be exbefore any governnbership.
developing coun te, implement, and hall. For the great be few restrictions purchase, or sale. continue to be freee CGIAR system. have suggested that |rs from the IARCs misappropriation in R. These materials be accurately deslescriptions widely
ements need to be nents of the counNot inconceivably, ted with misapproeatest in countries
These concerns may however be more imaginary than real. A country that has introduced PBR legislation most often has reached an advanced stage in plant breeding and has less need of semifinished materials. The IARCs' primary clients are those with a less developed capability who would not likely have adopted PBR legislation.
Restrictions and Counter-Restrictions
Plant breeding is msot effective when done from a wide base of genetic resources and wher testing of improved lines is carried out across diVers locations. The international exchange of germ plasm is therefoe an important element in the development of good breeding strategies for both developing and developed countries.
As legislation restricting access to new varieties is increasingly adopted, developing countries can likewise be expected to tighten access to the genetic resources avail ble on their home turf. Indeed, many now argue that their indigenous germ piasm is a national resource like forests or mineral deposits to be exploited commercially.
While understandable, such an atti
tude, like the introduction of PBR, could result in greater restrictions on the movement of germ plasm. Clearly,
this could be counter-productive for
all concerned. The situation needs to be monitored carefully.
25

Page 28
Some Aspects of the Informal Rural Credit Market in Sri Lanl
Nimal A. Fernando Central Bank of Sri Lanka.
AS in many other developing countries in Asia, Latin America and Africa, the Informal Rural Credit Market (IRCM) occupies an important position in the rural financial market in Sri Lanka. The main purpose of this short article is to examine several important aspects of the IRCM in the country.
While a thorough analysis of IRCM is useful in many respects, the limited data base does not warrant such an analysis. Islandwide data on the Informal Rural Credit Market are available only from the Consumer Finance and Socio-Economic Surveys of the Central Bank. These data too cover only a limited range of variables. There is a large number of micro-level studies dealing with some aspects of the IRCM in the country; yet many of these do not provide adequate details and only refer to the existence of extremely high rates of interest.
Lenders and Borrowers
An important aspect of the Informal Rural Credit Market is that there exist numerous types of suppliers in the market. These include friends, rela
tions, professional and semi-profes
sional money lenders, boutique keepers, landlords, commission agents, agricultural produce dealers in the primary market and employers of agricultural labour. These different types of suppliers have widely different objecti
VeS.
On the demand side too there are numerous types of borrowers such as agricultural labourers, tenant farmers, smallholders of cash crops and owner operators of food crop lands. Though numerous types of borrowers operate in the Formal Rural Credit Market as well, there the degree of diversity in this respect is not high. Also certain types of borrowers such as agricultural labourers do not figure significantly in the Formal Rural Credit Market (FRCM) while they do occupy an important position in the IRCM. In eco
26
nomic terms, the the poor and rich, operate in the IF poorest of the po poor as well, are from bulk of the place in the FRC rence in the type ting in the two mar explaining a numb tant aspects of the
Interest Rate Struc
The very fact t suppliers With mu with borrowers wh geneous in Socioec tics produces a wi complex structure the IRCM. The co reinforced by the given supplier char interest on the lo duration and purpc rent borrowers. Th contrast with the structure in the F Market. where rat form of administer fore, variat. On acr and borrower cate tively very much le
However, not complexity one in broader aspects o structure of the IR volume of loans gi
rest has been a
1969, interest free 46% percent of th loans granted by according to the S dit and Indebtedni ber of subsequen vealed the domina loans extended fr survey of Credit Among Paddy Farr ducted by the Cei revealed that 31 p. mal sector lending The data referrin 1981/82 confirme

) OOrest of the poor, all these categories RCM, although the oor, and often the virtually excluded transactions taking V. This basic diffeof borrowers operakets is significant in per of other imporIRCM.
ture
hat a wide array of tiple interests deal o are highly heteroonomic characterisde spectrum and a of interest rates in mplexity is further fact that even a ges varying rates of Dans of Same size, se granted to diffeis stands quite in simple interest rate ormal Rural Credit es often take the 2d prices, and thereOSS both suppliers egories is compara
SS.
withstanding this hay observe several f the interest rate CM. The significant ranted free of intesalient feature. In loans accounted for he total amount of
informal sources, urvey of Rural Creess (SRCI). A numt surveys too reaunt position of the ee of interest. The
and Indebtedness mers (SCIAPF), contral Bank. in 1976, ercent of the inforwas free of interest. g to 1978/79 and di further the signi
ficance of interest free loans in the IRCM. Such loans accounted for about 43 percent of the total amount lent by the informal sector in both periods. However, the importance of interest free loans should be evaluated cautiously as some of these loans may in fact have a hidden cost
Undoubtedly a significant propor
tion of the interest free loans is exten
ded by friends and relatives. The SRCI of 1969 disclosed that they accounted
for 46 percent of the quantum of in
terest free loans. But a wide array of other persons who have vested interests in the borrowers economic activities too provide interest free loans. Produce dealers and boutique keepers extend such loans to some of their clients. However, without adequate data and information it is difficult to make a generalization on the hidden costs that such loans may carry. Yet, it is safe to conclude that the quantum of actually interest free loans could be lower than what was revealed in the
surveys referred to above.
Another salient feature of the IRCM is that a significant proportion of the volume of informal lending has been extended at interest rates which are not significantly different from the unsubsidized rates of the FRCM. Nimal Sandaratne noted this in analysing the data gathered in the SCIAPF of 1976. The same observation may be made with reference to the rural credit data gathered in a number of pre-1976 as well as post-1976 surveys. For example, approximately 38 percent of informal lending in 1978/79 and 20 percent of informal lending in 1981 / 82 were at interest rates in the range of 1-30 percent. The unsubsidized formal sector interest rates during the same years were also in the range of 20-25 percent.
Another aspect, perhaps one of the most significant aspects, of the IRCM is that despite the common presumption only a relatively small proportion of informal loans had been transacted at what may be considered exorbitant rates of interest. In 1969, only about 18 percent of the household borrowings was transacted at rates over 25 percent per annum. In 1976, 23 per
econd MC Review June/July 1987

Page 29
sent of the borrowings from the informal sector fell into the interest class of
26-50 percent per annum. Similarly, in 1978/79 about 11 percent of the informal loans fell within the interest class of 31-60 percent and another 6 percent in the Over 100 percent interest class. Yet, in 1981/82 a greater quantum has been transacted at high
rates. The data for 1981/82 revealed
that as much as much as 19 percent of informal loans was at rates over 100 per cent while another 16 per cent was at rates in the range of 31-60 per cent.
It is not however clear whether 1981|
82 marks a turning point in the pattern of the interest rate structure. But with the exception of 1981/82, the proportion of loans transacted at exorbitant rates has been small in genral. However as Sandaratne noted, it is these loans which have drawn the attention of most commentators and observers of the rual economy. He added that the marked contrast of these interest rates from those of the institutional sector has led to its characterization as an exorbitant and usurious one.
It is the money lenders who have been characterized as most exploitative and parasitic in the rural financial market. Yet the available data do not Support Such a generalization. A Survey of the available literature clearly indicates that this generalisation is based on Small-Scale micro-level Surverys rather than scienfifically conducted island-wide surveys of rural credit. The 1976 data revealed that 16 per
cent of the loans granted by the money lenders was at rates below 16
percent while 49 percent of the loans
was at rates below 26 percent. About
34 percent was at rates in the range of 26-50 percent. Only 18 percent of the loans was at rates over 50 percent.
It is not argued here that high interest rates do not exist in the IRCM. In fact such rates do exist and will continue to exist in the future. But it is wrong to conclude that the average rates of interest in the IRCM are exorbitantly high. Often those who refer i : high interest rates do not make reference to the quantum of finance transacted at those rates. This tends to give a distorted picture of the interest rates prevailing in the RCM.
ECONOMic REVIEW June/July-1987
Factors influencing
An important i would one analyse t the RCM. Interest in the formal mark ningfully analysed classical economic cc extra-economic cons important role in th ties of the rural se fluencing interest r in the informal ru transcends the limi economic analysis. tions in the credit m be meaningfully seg of the land or labou tra economic consi even more predomir analysing the intel IRCM both economi economic factors Wi into account togeth
relationships of trar
ple markets.
It was pointed ol nificant proportion ding is free of intere sible that some of th den COstS. Yet even mitation, existence loans confirm the i ship and freiendship not possible to ar. them do not have ternative investment
funds. But they pro
free (at negative r they value more th existing Social relati strengthening them
In fact, interest always un productiv of view of the sup interest free loans b tives may be interp: to establish recipro
- which they can dra
in Other Words Suc part of a complex spreading risk. In th of funds at one po person who demanc point of time.
However, the bo landlords may pro

interest Rates
tuestion is how he interest rates in ate determination
ets may be meain terms of neo
incepts. Yet, since iderations play an e economic activiciety, factors inate determination ral credit market is of neo-classical Also, the transac
irket cannot often
legated from those market where exderations play an lant role. Thus, in "est rates in the c as well as extraI have to be taken er with the inter
Lsactions in multi
t earlier that a Sigof informal lenst. It is quite pos
ese loans have hid
Subject to this liof interest free importance of kinin the IRCM. Is is gue that many of more attractive al
avenues for their
Vide funds interest 2a1 rates) because e continuation of
Dnships or perhaps.
uirther.
free loans are not
e from the point
liers. Provision of y friends and rela
eted as an attempt.
cal obligations on
V in time of need; h loans constitute Social systems for 2 IRCM, a supplier nt may become a S funds at another
utique keepers and vide interes free
loans mainly due to their own economic interests. Where retail trading is competitive the boutique keepers may extend interest free lonas to retain or expand their share in retail trading in the market. Some of them may overprice the goods and hide the interest. But we do not know whether all boutique keepers always do so. The landlords may provide such interest free
loans to ensure adoption of better cul
tural practices by thier tenants which in turn bring benefits to the landlords
too.
Another important question is how would one explain the existence of very high interest rates in the rate structure of the IRCM. Theoretically the highrates may result from four factors: a) high opportunity cost of money; b) high administrative premium, c) high risk premium; and d) existence of monopoly in
the market.
The opportunity cost of money may vary from one money lender to another and Over-time for a given
money lender. It is determined by a
complex set of factors. Higher opportunity cost, cetris paribus, leads to a higher interest rate. Money lenders have to keep a sufficient amount of funds in the form of cash in order to
serve their clients quickly. Speedy ser
vice is an important characteristic of the IRCM. However, idle money involves a cost to the money lender which he passes on to the borrower. The quantum of money he has to keep idle and the period for which he has to keep this quantum influence his interest rates.
The seasonality of demand for credit also involves an opportunity cost. If the money lender is unable to synchronize his other investments with the seasonal pattern of demand for his.
funds, a part of the funds may be idle
with him. Thus a longer slack period may lead to a higher interest rate.
Administrative costs too influence the interest rates. An important aspect of this cost component is that its incidence tends to decrease as the size of the loan rises. In general, the administrative cost is relatively lower in the IRCM when compared with that of
27

Page 30
mium (RP). A major factor affecting
23
the FRCM. Within the IRCM, the ad
ministrative cost is greater in the case of professional money lenders than in
the case of boutique keepers, partly
owing to the fact that different economic activities are combined by the latter.
A significnat proportion of the loans extended by the money lenders in the IRCM consists of Small size loans ranging from Rs.200/- to about Rs. 750/-. Also most of them are for short periods. These two factors together raise the administrative cost of such loans which in turn leads to higher rates of interest.
A factor which reduces the administrative cost of money lenders is that the bulk of their borrowers consist of
known persons and many of them are
not new clients. Given the limited size of their individual markets money lenders Often have information about even new or potential borrowers. This lowers the administrative cost. On the whole, high interest rates in the IRCM cannot be explained in terms of the administrative cost as the overall magnitude of Such COSt in the IRCM appears to be low. Yet, certainly it is a component of the interest rates in the RCM as it is in the FRCM.
Perhaps, the most important factor which explains the high interest rates prevailing in the IRCM is the Risk Pre
the RP is the default rate. Like institutional lenders, non-institutional lenders too experience defaults. A popular preSumption, hOWever, is that the dominant position of the money lenders in the Socio-economic and political structures in the rural Society enables them to use even extra-legal measures to recover the funds lent by them. Yet, it is difficult to accept the position that they recover all the funds they lend. Many tend to ignore the
other side of the picture. A significant
proportion of the borrowers operating
in the IRCM falls into the categories
of poorest of the poor and the poor. Income levels of many of them are highly vulnerable to market fluctuations and weather. Their health status is poor and they are likely to fall sick
frequently. Thus, lending to them
carries a greater risk of default. It is this very same high risk factor which,
to a large exten nal lenders ava network. The ri Securities of acc obtained. But
many. Such borro
not have Such Si institutional lent der's capacity portfolio to redu tor of his operat In a given area, who tend to reli rich and influen access to institu provide loans o interest. If we as
rate is 20 percer cost of funds is ministrative cost of Rs. 100/- the works out to 30 to what extent t sult in higher IRC.M.
However, un cial scientists an believe that the rates are high du enjoyed by money lenders. vide theoretical sumption. Ofter
one supplier in
existing 1 inders
themselves from new entrants in polistic prices
therefore be maj riod. It is not
monopolies mai riods in certain : to maintain Su long period of explanation is . research. It is t tions of high r: IRCM. High rate a monopoly situ monopoly is onl of high interest 1 ty costs and the
terest rates may competitive situ
Hitherto, w supply side fac demand side fac interest rates in

t keeps the institutioy from their lending sks can be reduced if septable value can be almost by definition ) wers in the IRCM do ecurities. Also, unlike ders, the informal lento diversify his loan ice the overall risk facions is extremely low. it is mainly the poor y on the IRCM, while cial persons have easy tional sources which Pten at lower rates of SSume that the default
ut and the opportunity 17 percent and the adis 5 percent for a loan : risk premium (RP) .5 percent. This shows the RP alone would reinterest rates in the
fortunately many sod policy makrs tend to
; rural Sector interest
e to monopoly powers
the non-institutional
It is difficult to pro
Support to this asthere are more than
a given area. These are unable to protect the competition of to the market. Monoand profits cannot Lintained for a long pedenied that localized y exist for short pe
areas. But it is difficult
ch monopolies for a time. The monopoly not based on Scientific ased on ministra
tes of interest in the
S may prevail. Without
ation in the market as
y One of several causes rates. If the opportuni; RP are high, the inbe high even under ltions.
a discussed only the tors. In addition, the tors too influence the
the rural sector. The
strength of the demand in relation to
the liquidity in the IRCM is an important factor on the demand side. Excess demand situations tend to push the rates upward. The demand in farming areas may vary largely with the weather patterns. Adverse weather conditions tend to raise the demand thereby putting pressure on the rates. -
In the foregoing analysis attention was focussed on only one component of the price of credit, i.e. the interest rate. We ignore the transaction costs of credit. Transaction costs (TC) includes travel costs, value of time spent to obtain the loan etc. In the IRCM, TCs are negligible, but in the FRCM, such costs are significant for borrowers of small amounts. Therefore, if the interest rates of the IRCM are compared with those of the FRCM one tends to get a mislending picture. What one should compare is the price of credit in the IRCM with that of the FRCM. Since the TC is relatively much higher in the FRCM, when price of credit is compared One Would find that the dif
ference between the two markets is .
not so wide.
In a comparative analysis another adjustment is necessary for the interest rate in the FRCM. It is required to
take unsubsidised interest rates into
account in the analysis. When one does this, one would find that the average price of credit (that is interest rate plus transaction costs) in the IRCM is not exorbitantly high.
Conclusion - -
The higher price of credit in the IRCM is largely a combined result of the high risk premium and the higher opportunity costs rather than the m0nopoly power of the money lenders.
Therefore, from a policy point of view
it is required to place greater emphasis
on development of rural financial mar
kets, reduction of risk and uncertainity in rural farming, and improving agricultural practices. Such measures would tend to reduce the relatively high price of credit in the IRCM. In conclusion, I shall raise one question. Is it correct to generalize that the Sup
pliers of credit in the IRCM are para
sitic, anti-development and exploita
tive just because their interest rates in
the market are comparatively high?
ECONOMIC REVIEW JUNE/JULY - 1987

Page 31
Trade in Services and Developing (
Jeffrey J.Schott and Jacqueline Mazza -
Developing countries have much to gain from the strengthening of multilateral discipline over trade and could benefit from services trade negotiations such as those being conducted under the Uruguay Round talks of the General Agreement on Tariffs and Trade, acording to these two trade specialists.
Jeffrey J.Schott is a research associate with the Institute for International Economics (it E), a private research organization in Washington, D.C., and Jacqueline Mazza, who was a research assistant at E. When this article was written, is currently an economist with the U.S. House of Representatives Democratic Study Group. This article is an abridgment of the original.
Courtesy JOURNAL OF WORLD TRADE LAW
The members of the UN’s General Agreement on Tariffs and Trade (GATT) have just embarked on the eight multilateral round of trade negotiations since the founding of the organization in 1948. The negotiations come none tO o SC On The World trading System faces a rough road in the years ahead, for several reasons:
The recovery in world trade from the double blow of global recession and the debt crisis in developing countries (LDCs) is far from robust. Growth in world trade fell to under 4 percent in 1985 from 9 percent in 1984。
Unemployment in the Organization for Economic Cooperation and Development (OECD) area remains high, exacerbating protectionism in sensitive sectors Such as textiles and Steel. LDC exports will feel the pinch as governments that face critical elections come under mounting pressure to impose new import restraints.
Many LDCs still face severe debt problems and foreign exchange constraints that force them to maintain stringent import controls. Meanwhile, restraints on their exports could hamper their export-led growth strategies
ECONOMIC REVIEW JUNE/JULY - 1987
and spawn a new w; dulings.
The causes of stretch well beyon the GATT. The ma of exchange rates : effects of the LDC contributed importa ning of the world t rallel progress to War these problems is talks are to Succeed.
But the GATT worked well. The under frequent atta because its rules do segment of world t visions are evaded GATT' arrangemen tifibre Arrangemen restraint agreements tlement procedures abuses by major por has been embraced dustrial countries “shot in the arm th
The mOSt Conte GATT members as round is trade in agreement was rea Este, Uruguay, to i On Services on a S. those on goods, de led by Brazil and number of concer there even should services and, if so, be conducted wit opposed to the U ference on Trade (UNCTAD) and ot bodies. By contrst. along with other i regarded the inclu GATT talks as the new round and, inc
of the efficacy of t
In essence, LDC inclusion of negot a new round inv

ountries
ye of debt resche
these problems the confines of sive misalignment ind the disruptive debt crisis have htly to the weakeading system. Pa
| the resolution of
essential if trade
itself has not GATT has come 2k in recent yearS not cover a large ade, existing prothrough “extra S Such as the Mult and voluntary , and dispute sethave failed to curb wers. A new round by LDCs and inalike as just the Le GATT needs.
tious issue before they start the new services. Although ched at Punta del nclude negotiations 'parate track from veloping countries, india, have raised a ls about whether e a negotiation on whether it should in the GATT, as lited Nations Conand Development her United Nations the United States, 1dustrial countries, ion of services in sine qua non of a eed, aS a barometer e GATT itself.
concerns about the tions On Services in lve a fundamental
question of the shape and direction of
the GATT. The LDCs have seen the GATT as a vehicle to promote merchandise trade, particularly in manufactured goods and commodities. While manufactured exports have grown faster than total exports over years, LDC manufactured exports in 1983 still only accounted for 12 percent of world trade compared to 7 percent in 1973. The LDCs would not like to see the negotiations on services take the focus away from negotiations O11 longstanding trade problems. LDCs also see four additional negotiating problems with the GATT talks: (1) how the most-favoured-nation principle will be applied to trade agreements on services; (2) how the national treatment principle will be applied to foreign services competitors, particularly in industries such as banking, insurance, and telecommunications; (3) the possibility that the inclusion of services in the GATT would open up LDCs to new trade disputes and reta
liation; and (4) concerns that certain
issues, such as labour services, could be excluded from the talks.
The issue of trade in Services still could prove disruptive in the new GATT round unless care is taken to understand the issues and interests at stake. The current perception is that services is a “North-South’ issue, with
"the gains from trade accuring to the
OECD countries at the expense of the LDCs. But the LDCs also have a critical interest in services trade, both for their economic development and their balance of payments.
International services transactions
The Service sector is complex and
heterogeneous, ranging from high-technology telecommunications to low
technology haircuts and encompassing
a broad range of financial, transport, and construction/engineering services. The diverse nature of service industries complicates the task of developing a coherent set of principles and rules to cover international services transacttions. The paucity of data on traded services makes it difficult to measure what would be at stake in prospective negotiations. In light of such daunting obstacles, many countries were hesi
29

Page 32
tant to embark on negotiations on services. There is confusion about the importance of Services to economic growth and the role services play in the world trading system.
Trade in services is not a new issue, but it is an increasingly important one for the international trading system. Over the past decade, global services exports have grown in lockstep with merchandise exports, and they now total about $ 400,000 million per year. There are three main reasons for this growth.
First, there has been a dramatic increase in the “tradability” of services. New technologies have revolutionized the number and types of services available internationally. The communications revolution has reshaped industrial organizations and labour markets, opening up new opportunities for internationally provided services. New information technologies permit more decentralized bases of production in more integrated multisector firms.
These trends encourage specialization
and economies of scale in the production and trade of services.
Second, the growing interlinkages, between services and goods production
have greatly expanded services trade.
Services now are an integral part of thế production and marketing of many manufactured goods. Services provide essential inputs (from engineering design to data processing), drive the production process (for example, robotics and automated assembly lines), and facilitate the marketing of goods, from financing and insuring the transaction to providing after-sales maintenance. Moreover, as products become more sophisticated, less materials and more technical services are needed. In the 1960s, services such as software to run a computer accounted for Only about 20 percent of the cost of the computer system; today the hardware costs are 20 percent, and software, engineering, and consulting services absorb the rest.
Third, the liberalization of trad and capital markets has contributed to growing demand for services in in creasingly interdépendent markets.
percent annually 1983, about the dise exports. Foi also expanded average annual
' ring 1965-1969
$ 49,400 millic These investime tionals to centra
vided a growing
veloping
vices. The imp ments such as th technology tra major concerns countries.
Services acco economic activi and developing ted States, for e. cent of gross na and 74 percent tural employme contrast, the sh in LDCs ranges low-income eco. for medium-incC upper-middle-inc ment in Services of the Work for cent in Kuwait. fact that Service a faster rate in II economies. Bets the average annu vices was 2. Il pe nations, 1.3 per LDCs, and 5.3 tively, in the m LDCS.
The accomp; an aggregated ports of services COunt countries are by ters of services, nant position h, 1984, industrial for 74 percent ports, down fro1 LDC exports ha by 27 percent, decade, but they 26 percent of w most rapid grow been in other p
and income; thic
7,500 million S

over the period 1968Same rate as merchanreign direct investment substantially, from flows World Wide duof $ 6,600 million to Dn during 1980-1983. ints allowed multinalize purchases and promarket for traded Serlication of developese for investment and nsfer have sparked in the less developed
unt for a large share of ty in both developed countries. In the Unixample, almost 67 perational product (GNP) of civilian non agricul:nt is in services. By are of Services in GNP
from 29 percent for nomies, to 49 percent me and 52 percent for Some LDCs. Employ
varies from 5 percent ce in Nepal to 64 perThese figures mask the s have been growing at DCs than in industrial ween 1973 and 1983, ual growth rate for Ser:rcent in the industrial cent in the high-income and 5 percent, respechiddle-and low-income
anying table provides picture of world ex
by industrial and deries. The industrial far the largest expor
although their domias been slipping. In countries accounted of world Services exm 81 percent in 1975. ave grO Wn. On average per year over the last | still account for only Orld services trade. The th of LDC exports has rivate goods, Services, pse exports rose from
(SDRs) in 1975 to 39,700 million SDRs in 1984, accounting for a little less than half the growth in total LDC services exports. This is particularly important because the catch all category of “other private services is the one most likely to be affected by new trade negotiations.
Aggregated balance-of-payments Statistics hide many important differences among the LDCs. Developing nations vary markedly as to the size and composition of their services accounts and the international competitiveness of their service sectors. Analysis of the Services accounts of six major LDCs in the 1980s shows the sharp differences between those with high debt burdens and those whose foreign debt is relatively low. -
High-debt LDCs (Brazil, Mexico, Argentina) have large invisibles deficits due primarily to payments on factor services, that is, debt servicing. Trade negotiations can have an indirect effect on this problem, although the new trade round will not deal with debt issues. Nonfactor Services and other private services play a relatively minor role in the balance of payments of these countries. For Mexico, other private services actually contribute to a surplus in nonfactor services. For all three nations, factor services have been consuming a greater proportion of the services outflows over time. In 1980, investment income accounted for 52 percent, 64 percent, and 44 percent of the services expenditures of Mexico, Brazil and Argentina, respectively. By 1984, these figures climbed to 71 percent, 77 percent, and 69 percent.
By contrast, the low-debt LDCs (India and Singapore) have strong Services accounts. Both countries traditionally run surpluses, although India ran a small net deficit in 1982 due to payments on other transport. "Other services' is the primary revenue generator, contributing in 1983 about 60 percent and 36 percent of total services revenues in Singapore and India,
respectively.
LDC concerns
The developing countries have long recognized the importance of services
ECONOMIC REVIEW JUNE/JijLY- 1987

Page 33
WORLD SERVICES EXPORTS
(thousand milions of special drawing rights”)
indust
Year World" countr
Shipment 1975 23.O 2O2 19830 4.2.2 35.4
- 1984 473 36.5 Other transport 1975 27.4 21.
1980 61.1 46.2
1984 76 53.
Trave 1975 35.4 26.3 198O 76.9 54.( 1984 92.3 65.4
Other private goods, 1975 47.3 . 39. services, income 1980 . 108.5 84.5 1984 139.7 1 OO.(
Other official goods, 1975 11.9 9.8 Services, income 1980 23.3 19.8
- 1984 32.6 28.3
Total services (excluding 1975 145.O 176 investment income) 1980 312.0 239S 1984 383.5 283.
"U.S. dollars per special drawing right, year average: 1975, 1.21415; 1980, 1.301. "World total may differ due to rounding.
Notes: 1. "Shipment' includes freight, distributive services performed during the course ance "on movable goods during the course of shipment." Note that other insura cluded in "other private goods, services, and income." 2. "Other transport" includes passenger services, port services, and charters. 3. "Travel' includes all tourism receipts and expenditures other than internation business travel and student exchanges. 4. "Other private goods, services, and income' includes labor income, property ir intangible assets often classified as royalties and fees, nonmerchandise insuranc urns or claims, communications, advertising, brokerage, management, operatior tangible assets, periodical subscriptions, processing and repair, merchanting, and cal services. 5. "Other official goods, services, and income' includes transactions of general g tras bank.
Source: international Monetary Fund, Balance of Payments Statistics, Yearbook:
to development. Services comprise growth and their all
much of the nation's basic economic “infrastructure - transportation, banking, insurance, and communications.
Services are critical to the resolution
of many of the “human problems of development - better health care, education, and food distribution. Services provide an important channel for the diffusion of technology from industrial to developing countries. And services are integrally involved in the production and distribution of both manufactured goods and commodities. These interlinkages mean, as stated in a report of the UNCTAD Secretariat, that “services dramatically affect the Overall development performance of countries’.
While the LDCs recognize the importance of Services to development, they are apprehensive about liberali
Z1ng services trade. They fear that liberalization may hinder economic.
EconoMic REVIEW JUNE/JULY-1987
development policies to gain and much to cerns are based on th LDCS do not har advantage in traded st - Their infant servic protection; and
-Liberalization wo national security and With regard to co tage, the LDCs belie a comparative disadv and that this disadva have little to gain fi tion Of Services trad ralization would leac ports, hampering th indigenous service i bating current-acco condemming the Th. * permanent importe high-technology goo diplomat was quoted
 
 
 

S LDCS
28 6.8 10.8
5.6 14.9 18.5
8.8 22.9 26.9
7.5 24.0 39.7
2.1 3.4 43
26.8 72.O OO.2
3, 1984, 1.02501.
of shipping, and insurnce transactions are in
hal transport, as Wel as
come from nonfinanciali e recorded as met premihal leasing or rentals of professional and techni
jovernment and the cen
Part II (1982, 1985), 5ility to manage ... They see little
lose. Their con ree perceptions: re a comparative
vices: e industries need
fuld impinge on
Sovereignty. -
imparative advanWe that they have antage in Services ntage means they Om the liberaliza2. They fear libeto a Surge in im: development of industries, exacerLnt deficits, and
rd World to being is of services and lis”, as a Brazilian as Saying.
The traditional theory of compara
tive advantage Suggets that merchan
dise trade patterns are determined by relative factor endowments. Recent studies indicate that the principle of
comparative advantage also applies to
trade in services. British economists Brian Hindley and Alasdair Smith have concluded that “services are different from goods in ways that are significant
and that they deserve careful atten
tion, but the powerful logic of the theory of comparative advantage transcends these differinces. Similarly, and consistent with the factor endowment theory of comparative advantage, Andre Sapir and Ernst Lutz reported in a World Bank working paper that countries with abundant physical and human capital were most likely to be Services exporters. Their finding seems to confirm the notion that comparative advantage in services lies with the developed world. It does not mean, however, that LDCs have little to gain from liberalized trade in Services.
AS in goods trade, the gains, from international trade in services come from
improved efficiency from Specialized
and increased trade flows. Imports provide cheaper and higher quality services than are available in the domestic market, promoting a more efficient allocation of scare economic resources.
Moreover, although a country may
have an absolute disadvantage in ser
vices trade it can have a comparative
advantage in the export Of çertain services. A number of LDCs have proved to be successful exporters: the Republic of Korea and India in construction services and Singapore in transport and financial services, to name just a few.
For example, LDC firms are using the experience gained in building roads,
bridges, and waterways at home to ex
port construction services. The Hyundai Engineering and Construction Company Ltd. of Korea ranks among the top five contractors in the world, building ports, shipyards, industrial plants, and commercial and residential facilities primarily in the Middle East and Southeast Asia. Its most prominent venture was the S 931 milion Jubail industrial harbor project in Saudi Arabia. The Brazilian construction and engineering firm of Constructora Mendes Junior S.A. has over 12,000 workers abroad, with total contra ES

Page 34
*
valued at S 2,000 million throughout Latin America, the Middle East, and Africa. -
The growing trend toward large scale international projects also opens up new business opportunities for
LDC firms. Projects often are too large ,
or diverse for any other corporation and can be better managed through syndication and joint ventures. Companies can expolit market niches by linking up with larger, multinational firms. This has proven particularly important in banking and insurance, where companies need to pool their risk in large ventures.
Advances in technology are making it easier for the LDCs to capitalize on
the advantages of low-cost, skilled la
bour. Data processing centres and engineering design units, linked to foreign corporations through international telecommunications net works, already are flourishing in countries such as India and Korea. And LDCs can profit from their comparative advantage in labour even in a capital-intensive industry such as airlines. Singapore Airlines is one of the most efficient in the world, not because it holds a capital advantage but because of its lower labour costs and better service.
The LDCs are concerned that ope
ning up their economies to foreign
competition will damage their infant service industries. With many traded services such as banking, insurance, and telecommunications dominated by large multinational firms. LDCs feel they are at a distinct disadvantage,
lacking the capital resources and the
experienced personnel to compete effectively. They argue that their nascent service industries require extensive protection, much like that enjoyed by the heavily regulated service industries in the developed world. Many of their arguments echo similar concerns Over predatory competition from multinationals in merchandise trade.
Infant industry protection
International trading rules allow temporary protection for 'infant industries to reach the point where they
can exploit their natural comparative
advantage. Such protection provides
l
“breathing roon dustry to overc Of eXperiment StreSS. It is a SSu : tection, the infa ver get Started.
Most exampl involve import industry. In the ever, calls for 'i tion have take ing. LDCs argu
of emerging 'il
is necessary for
internationally in other words fits of a strong, tor outweight til protection.
Whether the racterization of braced, the san asked: Do the outweigh the co assist LDCs in ex comparative adv.
The costs of
borne not only
ted industry but tries for which
technology. The large “spillover serious effect C study on insuran Brian Hindley fo policies tended
costs and disco from covering ri fits to limited di tectionism was LDCs much for main aim of insu
Indeed, LDC
foreign participa
insurance marke the pool of avail pools mean less pant, which tra1
coverage for do trast, reserving
firms concentra those firms, inc. bably limiting that can be prov
LDCs need protection may nologies and ec up scare capital
 
 

in for a developing inOme the initial period ation and financial med that without prount industry would ne
es of such protection relief for a particular case of services, howinfant industry protecn. On a broader meane that the protection infrastructure Services the development of an competitive economy; , the long-term beneindigenous service seche short-term costs of
narrow or broad cha
infant industry is em
ne questions must be benefits of protection sts? Would protection ploiting their long-run antage? protecting services are by the directly affecE also by those indusit provides inputs and repercusssions of Such effects could have a in development. In a ce policy in the LDCS. und that protectionist to drive up insurance urage potential users sks. Apart from beneDmestic Suppliers, proanlikely to have saved sign currency (often a rance protection).
y
's may benefit from tion in their domestic st if it helps expand able resources. Larger risk for each particiislates into lower cost
mestic firms. By conmarkets for domestic tes the risk on just reasing costs and prothe range of services ded.
to consider whether
lock in obsolete fechonomic structures, tie resources, and inhibit
growth. In many cases protection may be the very roadblock that prevents the development of a competitive industrial and service eCOn Onny.
LDCs also fear that opening up thier service sectors to foreign competition could infringe on their national security and Sovereignty in three ways. First, greater liberalization would open the door for more foreign or transnational firms to enter traditionally domestic sectors. Such firms have less at stake in the local economy, are more difficult to regulate, and may make decisions deterimental to the national interest (for example, exporting capital and retaining technology in-house). Foreign participation in media, arts, and entertainment industries has social
and cultural consequences as well.
Second, liberalization of services trade could involve removal of certain controls on foreign investment. Prohi
bition or limitations on rights of estab
lishment have been particularly burdensome for companies supplying telecommunications and financial services. Pressures for liberalization in Such Sectors will be strong because local establishment often is required to provide or distribute a service on a competitive basis. Such a prospect touches a sensitive nerve amoming LDC policymakers because, as an official of the Indian Government has stated, “free services trade seems to imply free foreign investment, which could impinge on national sovereignty and economic ambitionso.
Third, state-owned or state-control led firms would be subject to greater international competition, which over time could drive state-controlled firms out of business or reduce their influence. LDC policymakērs do not want to lose the political and economic control that comes with state ownership, particularly in new, hightechnology sectors, as is illustrated by Brazil in the informatics sector. They argue that the international trading system respects the needs of national security and sovereignty in the defense and transportation sectors, and they contend that infrastructure Services deserve similar safeguards.
Economic Review JUNE/JULY-1987

Page 35
Safeguards sought
The international trading system contains provisions that safeguard national security interests. For example, special protection is allowed for defense industries. GATT Article XX permits inter alia controls on commodities in short supply. Article XXI allows broad exceptions from GATT obligations for actions to 'supply a military establishment and “for the maintenance of international peace and security. In essence, the less developed countries would like similar exclusions so that they can control the development of indigenous service industries.
LDCs have deep-rooted concerns about the implications of services trade liberalization for their economic development. Regulation of service industries serves legitimate purposes and safeguards important national interests ranging from the Supervision of domestic monetary policy to defense. In many cases, however, regulation masks protectionism, creating distortions and impediments to growth. In particular, it serves as a disincentive to technology transfer and inflows of foreign direct investment needed to spur economic development.
LDCs are keenly aware of the importance of technology to development but are constrained in their ability to obtain or develop it. Many of the channels of technology transferforeign direct investment, technology embodied imports- have been blocked by trade and investment controls imposed by LDCs to protect infant industries and national sovereignty. Financial constraints limit direct acquisition of new technologies. It has also become difficult to license many new state-of-the art technologies. The speed of technological change has led many companies to hold their patents closely to maximize sales in order to quickly recoup research and development expenditures.
However, competition between the United States, Europe, and Japan is lowering the price and thus enabling LDCs to purchase “last year's models' of some high-technology goods and services. The recent sale of Control Data computers to India is a good
example. Althoug computers are abou use computer tech decade ago, the di With itS most adva computer to date advances in farmi merce, and science.
LDCs thus face ting policy choice on purchases of Purcahses Of Older logy are possible,
to put LDC indust. disadvantage in bo markets. Such a pc go the positive ext the research and de
Alternatively, W ter off if they had investment to adv, Is the difference concerns about de' reignty? Liberalizal the import of te goods and services. fundamental point ralization of some and investment c pressing need of r tional sources of d Protectionism crea inflows of foreign capital.
Not a "zero-sum'
Developing coul negotiation on trac of their Overall O GATT round-namt World growth, res crisis, and removal merchandise expo. services trade libe to the developm few LDCs, holds trade opportuniti and threatens the of Selective Servici Others. For most calls for liberaliza and infrequent.
Export gains in go primarily to tries. But services Zero-sum game. E. dustrialized count
 
 

gh the mainframe
it four years old and (nology developed a 2a1 will equip India unced and powerful
and will promote ng, education, Com
a series of conflicS. Should they rely older technologies? generation technobut they are likely ries at a competitive th export and home Dlicy also would forernalities dervied in :velopment process. sould LDCs be betaccess via trade and anced technologies? worth the perceived velopment and sovetion would facilitate chnology embodied But there is a more that argues for libe, if not most, trade ontrols. The most many LDCs is addievelopment finance. tes a disincentive to official and private
game
ntries need to view a le in services in light bjectives for a new aly, revival of Third olution of the debt
of barriers to their its. In this context, ralization is critical nt objectives of a he prospect of new es for some others,
protective barriers
è industries in a feW
LDCs, however, the tion will be muted
services are likely to the industrial couniberalization is not a port gains by the inries do not necessa
rily imply corresponding losses for the LDCs. First, developing countries are unlikely to be the main target of OECE services exports. Developed nations are both the largest exporters and the largest importers of services. This is unlikely to change in the near future. Second, expanded trade in services could serve as a conduit for technology transfer and help attract direct foreign investment critical for longterm development and modernization.
Furthermore, the task of integrating services into the framework of the world trading system may not be as Onerous as its seems. First, not all services transactions are amenable to an international trade negotiation. Second, many issues already have been addressed in negotiations in other forums. Third, negotiators deal with priority problems (as defined in their domestic political context). New rules need not be applied universally to all service Sectors in all countries; the government procurement code is an interesting precedent in this regard. Before rejecting participation in services negotiations, LDCs should consider, as a practical matter, what concessions they are likely to be asked to make and Over what time frame. Such an evaluation should go a long way toward calming the fears of LDC governmentS.
Finally, LDCs would benefit from services trade negotiations. As the weakest partners in the GATT system, LDCs have the most to gain from the strengthening of multilateral discipline Over world trade. The inclusion of Services should help bolster the effectiveness of the GATT. In addition, services trade liberalization would complement Several reforms of primary interest to LDCs. Because of the growing interlinkages between manufacturing and Services, a Standstill On new Services trade barriers would reinforce the proposed “standstill’- and eventual ʻʻro11backʼʼ of merchandise trade barriers. Both of these points underscore the Overriding importance to the LDCs of a successful new round of trade negotiations.
Courtesy: “Insight' which has re
printed this article.

Page 36
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SRI LANKA RS. 60/- SOUTH ASA US$ 1.6/- SOUTHEAST ASIA US$ 18/- AFRICA US$ 18/- JAPAN USS 20/- MDDLE EAST US$ 20/- REST OF THE WORLD USS 22/-
PRICE PER COPY RS. 5/. LOCAL US$ 2/-
INTERNATIONAL
ed or
Limited,
3.