MPI concept3

Our journey to the international markets - strategies and tasks for the Ministry of Primary Industries

A Concept Paper on Preparation of a National Primary Industries policy Framework

Ministry of Primary Industries,Sri Lanka

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“To build, to protect and grow mother Lanka by creating a welfare centric knowledge based econo-my centered on the competitive social market eco-nomic model to guarantee fair benefits to the peo-ple”

The most common definition of the term primary industries has two parts – in the first, a primary in-dustry is defined as an industry involved in the ex-traction or collection of natural resources, be they in agriculture, aquaculture, minerals or as being widely adopted today, in human resources. The second part of the definition involves any individual, company, corporation, or government body that turns a natu-rally obtained resource in to a product that has the potential of either being consumed as is or being processed further upstream.

The government of President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe, elected for a five year term on August 2015, has the task of implementing the policies enumerated by both President Sirisena in his policy statements on his election as President in January 2015 and policies set out by Prime Minister Ranil Wickremesinghe in the run-up to the elections in August 2015.

A priority area identified by both these sets of policies is the creation of new employment avenues and to make Sri Lanka a highly competitive, globally aligned and rapidly developing economy that needs to take its rightful place, lost due to a debilitating civil war for 30 years and mismatched, mismanaged economic policies of the previous government. The broad policy objectives of this export-led program will be to:

•To double the exports by 2020

•Expand export growth from 7% to 14% year-to-year

•Create 1,000,000 jobs by 2020

A major part of that task involves the creation of new economic zones and clustering over 2,000 vil-lages around those zones, to create a coherent and well-managed value chain that will encompass pri-mary industries, upstream processing of natural re-sources harvested from the primary industries, lo-gistics and distribution for the local market and, as a priority, opening up new export avenues for such products.

•Integrating farmers, small-scale industrialists, sup-pliers, and entrepreneurs into the global economy through innovative pooling of resources such as clustering, co-competitive marketing and other such organized collectives.

• Accelerated increase in urbanization through the megapolis programs

• Rapid urbanization will increase domestic consump-tion

• Consumption demand to be met by Primary Indus-tries and allied services

•Opportunitiesinagriculture,SMEindustries,fisher-ies, and services along with increased demand for allied services such as logistics, storage and distribu-tion

A new ministry has been created and tasked with a five-fold objective;

Who We are...

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• Implementation of National Policies in regard to Pri-mary Industries and Formulation of appropriate pro-grams and schemes

•Formulatestrategiestointegratefarmers,fishermenand small scale agro Businessmen into the global economy with emphasis on;

» Increased value addition

» Maximized export opportunities for such primary industries

» Improve sector productivity and competitiveness

» Ensure safety of primary industry products

•Implement National Policies to promote bio-security and sustainable resource use including value added products

• Implement National Policies to promote farmer’s agro business enterprises

•Matters related to Agricultural Development Areas, Agro-clinics and Fisheries Exports Development Ar-eas

This concept paper examines the scope of this en-deavor and will attempt to layout a foundation on which a more detailed policy paper can be prepared.

Ministry of Primary Industries,

Sri LankaThe unique value addiTion

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The largest single buyer of Sri Lankan exports, for most of our export products, is the United States with nearly one forth of our exports reaching the USA while the European Union, taken as a block, im-ports more than 40% of all goods produced by Sri Lanka. Neighbouring India is the next largest buyer with Russia and Japan following closely behind.

Post war, exports surged, starting from the low and depressed base, registering a growths of over 21 percent in 2010 and 2011, adjusting in 2012 with a dip of five percent and showing a steady growth of over six percent in 2013 and 2014. However, ex-ports as a percentage of our gross national products is showing a worrying decrease, from a high of 18.79 percent in 2011 to 16.25 percent in 2014.

In 2014, we exported US$11,878 million worth of goods and services with our finished goods, mainly apparel, surging from US$5,772 million in 2010 to US$8,067 million in 2014.

Neither the agro sector or the fisheries sector took part in the this surge wth fisheries only increasing less than US$63 million in that five year period. Agro products increased from US$2,216 million to US$2,699 million in the same five years. This in-crease came mainly from value added tea products.

Where We are...

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Sri LankaexTernal Trade

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exporT break doWn

The table above illustrates the composition of exports at desegregated level last year in 2014. It reveals that nearly 58% of total export earnings of Sri Lanka were derived from two products, namely garments [44%] and tea [14%]. Nearly 80% of the total export turnover came only from seven products reflecting the lack of diversification of Sri Lanka’s export basket.

In Rubber, our third largest export, we only have 0.50% of the global market share while being ranked the 31st out of 215 exporting countries. While we show an encouraging 35.7% of market share in Cinnamon while being ranked 1st, its worth bearing in mind that this excludes cassia, produces mainly in China and is being used as a cinnamon substitute dwarfing true cinnamon.

While textiles remain our biggest export earner, from a global perspective, we have less than 2% of the global market in textiles, while being ranked within the top twenty exporting countries out of 218, indicating the possibility of growth, both

vertically and possibly horizontally by integrating other elements of the textiles value chain, including cotton and yarn, into our product space for textiles. Both these comes under the scope of the Primary Industries Ministry.

In fisheries, our seventh largest export, we have less than 0.20% of the global market while anecdotal evidence suggests that our maritime economic zone may have enough supply to meet at least 3 percent of the global market.

Our market share in Electric and Electronic products, our fifth largest export earner, is listed as negligible while contributing nearly three percent of our export earnings. Sri Lanka is one of the lowest ranking countries for high-tech exports as a share of manufactured exports.

Comparatively, Vietnam shows the highest growth for share in high-tech exports, having only five percent in 2008 and increasing to 28% in 2013. (See tables in the next page.)

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Sri LankahoW oThers compare WiTh us in high Tech exporTs

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our raW maTerials..

Sri Lanka has the potential to increase high tech exports substantially. As the table above shows, we export large amounts of our minerals in their raw form without any value addition. Most of these min-erals are used as components in the manufacturer of high –tech circuit boards and electronic elements like transistors and capacitors.

Earlier attempts at establishing manufacturing plants for circuit boards (Motorola - 1997) failed due to structural inefficiencies in policy and their imple-mentation.

A recent innovation (2012) Graphene, a material that uses only high-end graphite thats mostly found in Sri Lanka holds the most potential for the future of our mineral industry. While industrial production of graphene is yet to start, graphene is already be-ing tested in laboratories globally for its strength, its ability to conduct electricity and other proper-ties and is said to be the strongest material known to man today.

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Sri LankabreakdoWn of our exporTs

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hoW We compare.. Then and noW

our markeTs over The years

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Sri Lankaour objecTives and Tasks

In short, the task for the primary industries min-istry is to maximize export opportunities for the primary industries; improving sector productivity; increasing sustainable resource use; and protect-ing Sri Lanka from biological risk. It needs to deliver high-quality services and support to the whole of the primary sector.

While currently Sri Lanka s primary industries serve both the local and the export market (for ex-ample, Sri Lanka is yet to export rice or paddy and fisheries exports are less than ten percent of the to-tal production), the task before the new Ministry will be to focus on export markets and to maintain and grow access to those markets. It will need to work with other shareholder ministries to help reduce, and preferably eliminate, tariffs and other barriers to trade for goods.

It needs to build trust with Sri Lanka s trading part-ners and ensure that goods meet their requirements and are produced according to and or exceeding international norms, ensuring there are systems in place to provide importing countries with safe prod-ucts that meet their requirements.

The end goal of the task will be to double exports arising out of the primary industries in five years time. This means achieving an average growth of 14% every year – a doubling of the current export growth of approximately seven percent per annum.

To achieve this milestone, the Ministry will need to

•Develop clear and measurable market access strate-gies

•Ensure primary sector exporters can access overseas markets

•Be involved in negotiating free trade agreements (FTAs)

•Contribute to the development of international standards

•Participate in Ministry-led trade missions

•Monitor exports quality and safety through robust auditing systems.

barriers and challenges:

There are a number of barriers to trade in food and forestry products, more so in agriculture, but less in seafood and forestry while export markets are dy-namic, characterized by rapid changes in compara-tive advantages, consumer preferences, product ranges and associated services. The declining rate of employment in the primary industries sector is of special concern and needs to be addressed first.

Of the main challenges that face primary indus-tries, increasing globalization alongside sharper in-ternational competition, changes in consumer pref-erences alongside pressure to step up economic efficiency and environmental concerns take priority.

Of these, globalization provides promising opportunities as well as greater challenges as much as opportunities presented through change of consumer preferences – for example the growing natu-ral health foods sector in the European and North American present some of the main oppor-tunities as well as challenges for non-traditional agriculture ex-ports.

It is difficult to distinguish pri-mary products from what is mar-keted by other countries, hard to create and maintain a competi-tive advantage. Low production costs, and low margin strategies are the most important means of achieving a competitive edge alongside marketing aimed at

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soluTions and paThWays...

achieving changes in the consumer mindset, such as using Ceylon cinnamon against the bark of the Casia tree, an inferior product that poses certain health risks. Achieving economies of scale and volumes of larger producers is another avenue of seeking bet-ter rent.

A major challenge facing the Ministry will be to co-ordinate with the other line ministries that also have responsibilities to the industries concerned and cost of policy implementation in terms of budgetary con-straints.

One of the major challenges the nation as a whole faces is to build trust with our trading partners after the debilitating civil war and policy decisions that re-sulted in our main trading partners distancing them-selves with Sri Lanka during the past regime. Trust, like credibility, once lost, is hard to regain. However, strenuous efforts taken by the current leadership is showing encouraging signs with major trading part-ners like the European Union and the United States softening stances.

In the product space, Sri Lankan manufactures will have to adhere to the client requirements in an envi-ronment where global corporations are increasingly imposing strict conditions of corporate responsibil-ity, certification and quality, producing according to and or exceeding the international norms. Meeting and exceeding such norms will help reduce international mar-ket entry barriers.

solutions and pathways:

a primary industry council of ministers..

It is proposed that a Primary industry Council of Ministers is created, similar to that of the Export Promotion council of Ministers created under the EDB act in 1980. Each ministry then becomes a shareholder (not just a stakeholder) and will reap the benefits accrued. The Ministry of Primary Indus-tries (MPI) will be coordinating authority and will be respon-sible for policy and monitoring in addition to direct interventions where necessary.

Of the main challenges, building trust, meeting cli-

ent requirements and meeting or exceeding interna-tional norms in production, are all process related. Process improvements, necessary accreditations and certifications like GMP, ISO, Organic, Fair Trade and other such linkages will help surmount the pro-cess related challenges.

It is proposed that the Ministry of Primary Indus-tries take a monitoring shareholding of an amount not less than five percent and not more than ten per-cent in any enterprise be it state, public-private or majority private, created through policy implemen-tation of the Ministry. This serves two purposes – one, and foremost, a continuing involvement of the state to ensure the policy framework is adhered to by the enterprise and second to ensure a self-gener-ating cash flow to the Ministry.

building trust

The Ministry will need to work with exporters to reduce, and preferably eliminate, tariffs and other barriers to trade for goods. This includes the provi-sion of trusted assurances that Sri Lanka s products meet the requirements of importing countries. The Ministry, along with other partner Ministries and stakeholders will need to ensure there are systems in place to provide importing countries with safe products that meet their requirements.

and a brand..

Today, Ceylon Tea and Ceylon Cinnamon are both accepted as of the highest quality and safe food products globally. The Ministry s task will be to ensure this brand awareness is extended to our other export products and to safe-guard and grow the brand aggres-sively.

Our scope, therefore, must in-clude the creation of international market access teams for each of the products we export, staffed by highly competent marketers with in-depth knowledge of the prod-uct, its global market characteris-tics and preferably, a knowledge of the languages spoken in the

countries the product is sold.

These teams will be tasked to develop clear and

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Sri LankaThe issue of employmenT

measurable market access strategies and to maxi-mize export opportunities by also reducing barriers to trade by influencing international trade frame-works and international standards. They will also be responsible for documenting overseas market access requirements and guidance documents pro-vided for information. They will be regular contact with key overseas counterparts to handle market ac-cess issues and trade responses.

Market access staff will help to establish and build robust primary production, food safety, and bios-ecurity systems for our assurances to trading part-ners that our products are safe and suitable.

creating employment:

Sri Lankan primary agriculture sector can be di-vided into three major categories. i.e. farming, fish-ing and aquaculture. As of 2008, 32.7% of the labor force was employed in the sector. There is evidence that this has declined marginally in the following years.

Agriculture, which has strong linkage from ancient time to rural livelihood and food security, is a cor-nerstone in Sri Lanka’s economic development and social wellbeing strategy. More than 70% of the population living in rural areas depends on agricul-ture for their livelihoods.

decelerating growth in the sector...

This decelerated growth of agriculture sector is at least partly contributive for relatively higher level of poverty and malnutrition in rural areas where the large majority of population depend on agriculture for their livelihood. Agriculture sector is not geared to release the labor for other sectors and to increase the productivity of the sector. In this context ensur-ing continuous stable higher growth of agriculture sector for the food security as well as well being of rural people has become central to the agriculture policy of Sri Lanka.

A stated priority of the new government is to achieve full and productive employment and decent work for all, including women and young people, a goal embedded in the ILO Declaration 2008 on So-cial Justice for a Fair Globalization. In this context, analyzing the employment implications of sectorial transformation and growth needs to be prioritized.

Sri Lanka is in transition from factor driven to effi-ciency driven stage and the key determinants of ef-ficiency include higher education and training, labor market efficiency, technological readiness, market size, goods market efficiency, and financial market sophistication. The first three efficiency enhancers are closely linked with employment policy. While the Sri Lankan unemployment rate has shown a de-cline in recent years, a more objective breakdown

shows that the decline has come from a substantial increase of employment in the informal sector, rather than through structural ef-ficiencies in the formal em-ployment sector.

high unemployment amongst the youth

In spite of a declining trend of unemployment, the rate of unemployment stood at 24.7 and 17.8 per cent respectively among age groups of 15-24 and 15-29 in 2010. It was 6.9 and 11.6 per cent among in-dividuals with GCE O/L and GCE A/L and above qualifi-cations. Besides educated youth unemployment, the

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improving vocaTional Training

employment challenges of Sri Lanka includes declin-ing trend of labor force, under-employment, 61 per cent employed in the informal sector, 23 per cent of the employed engaged in elementary occupations, 24 per cent of the employed working abroad and about 50 per cent of migrant workers employed as unskilled workers, and earnings of a large section of the employed population falling below the poverty line.

A recent study on profitability and productivity of tea and rubber sectors also confirmed the low la-bor productivity and yield levels in the plantation sector (Gunatilaka 2011). It also confirmed the rela-tively high magnitude of labor costs in the overall cost structure based on stationary tests covering a period of ten years (i.e. 2000-2009). In overall terms, productivity enhancement in agriculture is affected by fragmented land use, insufficient availability of water, lack of credit facilities, seed, technical know-how, technology, marketing, storage and transporta-tion and poor farming practices.

an example from korea

Academics and agriculture specialists use Korea to illustrate structural changes in the sector over several decades. In the 1980’s agricultural produc-tivity in Korea was relatively low, and arable land was crowded with agricultural workers. As Korea in-creased the use of machinery and the application of fertilizers, agrochemicals and special seed varieties, productivity per worker increased. But this occurred as farmers realized they could produce similar or higher yields with less labor. As the rural population

declines, plot sizes increased enabling the remaining farmers to work on more land per worker. In sum, the expansion of agri-cultural production and produc-tivity in Korea, as in many other countries, released labor to the non-agricultural sector.

Overall, while it is certainly true that there is great potential to improve output and productiv-ity in agriculture in Sri Lanka, this will lower the demand for labor, not raise it. Moreover, this will occur in an environment of rapid population growth, further emphasizing the need for non-agricultural employment. The challenge for us is therefore to

create productive jobs in other sectors to absorb the labor released from agriculture and that generated by marginal population growth.

enlarging the vocational training scope

The current scope of vocational training remains limited to traditional courses like carpentry, civil work masons, and electrical foremen. If the econo-my is to diversify into new and more complex prod-ucts, specialized new skills will be required. To ad-dress a skills shortage, vocational training can be improved and targeted for diversifying industries. However, such training is unlikely to solve a skills shortage on its own. However, it is difficult ex ante to identify all of the skills a new industry will need. The development of the primary industries is important in promoting both direct and indirect employment. The latter is mainly through its linkages with other sub-sectors of primary and secondary sectors. For example, the forward linkages of paddy, coconut, fruit and vegetables and minor export crops sub-sectors with industry and services sectors have the potential to create employment opportunities for skilled and unskilled labor.

The continuity of high growth performance over the next 10 years would depend on development strategies aimed at high productivity, labor-inten-sive employment and creation of green jobs. In this context, the preparation of a comprehensive employment policy with a focus on productive ef-ficiency and labor intensity of growth are of vital importance.

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Sri LankaThe glass ceiling of exporTs..

Sri Lanka s exports are concentrated at the hands of a relatively small number of less than 300 export-ers who collectively account for more than 90% of the country s exports. This disparity of less than 10% of the total number of exporters accounting for more than 90% of the exports needs to be ag-gressively addressed as it points to strong structural inefficiencies that is preventing SME s from compet-ing in the export markets.

Relatively a small number of exporters are also be-ing created every year and hardly any new products are being exported, pointing to a serious lack of in-

novation and entrepreneurship.

Anecdotal evidence clearly suggests a glass floor around the Rs 500 million exports level, which is the threshold between a medium to large scale enter-prise. It is proposed that the ministry aggressively address the issues of the exporters who are current-ly exporting between 60 to 500 million as they will find it easier to break through the glass ceiling.

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We gratefully acknowledge EDB, BOI and Customs department in providing material for the prepara-tion of this concept paper.

meeTing demand WiTh supply

If the bubbles fall into the “Winners in growing sectors”, it means that the world demand for the product denoted by the bubble is increasing and also Sri Lanka’s share of that product in world exports is also increasing. Only our export product, Rubber and articles thereof fall into this category. Trade promotion efforts for this product should aim to broaden the supply capacity to cater to the mar-kets with increasing demand.

If the bubbles fall into the “Losers in growing sectors”, it means that the world demand for the product denoted by the bubble is increasing but Sri Lanka’s share of that product in world exports is declining. Our export prod-ucts such as Coffee, tea, mate and spices; Pearls, pre-cious stones, metals, coins, etc.; vehicles other than rail-way, tramway fall into this category. As these products face supply side bottlenecks, it is important to identify and remove the constraints in order to regain the market share.

If the bubbles fall into the “Losers in declining sectors”, it means that the world demand for the product denoted by the bubble is falling and Sri Lanka’s share of that prod-uct in world exports is also falling. Our export products such as Plastics and articles thereof; Other made textile articles, sets, worn clothing, etc; Electrical, electronic equipment; Fish, crustaceans, molluscs, aquatic inverte-brates nes; Vegetable textile fibres nes, paper yarn, wo-

ven fabric; fall into this category. Trade promotion efforts for these products in this group should adopt an inte-grated approach to remove both the demand and supply side constraints.

If the bubbles fall into the “Winners in declining sectors”, it means that the world demand for the product denoted by the bubble is falling but Sri Lanka’s share of that prod-uct in world exports is increasing. Our export products such as Articles of apparel, accessories, knit or crochet; Articles of apparel, accessories, not knit or crochet; Ships, boats and other floating structures; Wood & articles of wood, wood charcoal; Toys, games, sports requisites; To-bacco and manufactured tobacco substitutes; Machinery, boilers, etc., Miscellaneous chemical products; Edible fruits, nuts, peal of citrus fruit, melons; Vegetable, fruit, nut, etc. food preparations; fall into this category. From a trade promotion perspective, niche marketing strategies are required to be adopted for these products.

The behaviour of exports of Sri Lanka as indicated above shows the importance of adopting product specific trade promotion strategies and measures to remove the specif-ic demand or supply related constraints, which impede a more dynamic expansion of exports of the country. Such strategies would enable Sri Lanka to maximize on the op-portunities generated in the global market and reap the maximum benefits from trade opportunities available for our export products.

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