Building a resilient economy to withstand shocks

By Uwin Lugoda “It ain’t about how hard you hit, it’s about how hard you can get hit and keep moving forward,” said famous movie character Rocky Balboa in the 2006 boxing movie of the same name. While this is very true for boxers, and indeed people in general, it can also be applied to nations, particularly economies. External shocks are nothing new in the global economy, with so many countries being vulnerable to and facing them at any given time. External shocks are unpredictable events that affect a country’s economy; Sri Lanka tragically faced a major one a few months ago in the form of the Easter terrorist attacks. Apart from this shock, which could be categorised as a national security threat, Sri Lanka also faced other shocks such as natural calamities and power crises, all of which have, in one way or another, dampened Sri Lanka’s ability to reach its economic goals. In fact, just last week, many parts of Sri Lanka suffered from floods and landslides. The prevention of external shocks caused by occurrences like climate change and terrorist attacks is not always possible due to the unpredictable nature of those events. Therefore, a strong economy must be both prepared for any eventuality and resilient amidst heightened pressure in order to manage the aftermath of such events. Unfortunately, Sri Lanka’s response to external shocks has been largely insufficient and resulted in negative impacts on the country’s growth and image. During the Sri Lanka Economic Summit 2019, which took place on 17 and 18 September, a panel of experts in the fields of disaster management, defence, resource management, food security, and insurance explored the readiness of Sri Lanka’s institutions and businesses in being resilient, having the necessary infrastructure in place, and having the capacity to manage external shocks in a discussion titled “Building a Resilient Economy”. The panel consisted of Asian Disaster Preparedness Deputy Executive Director Aslam Perwaiz, who was the keynote speaker at the panel and provided a regional perspective. Other panellists were former Sri Lanka Army Commander Gen. Mahesh Senanayake, Resource Management Associates (Pvt.) Ltd. Managing Director Dr. Tilak Siyambalapitiya, University of Peradeniya Director – Agriculture Education Unit Prof. Buddhi Marambe, National Insurance Trust Fund, Sri Lanka CEO Sanath C. de Silva, and International SOS Security Specialist – South Asia Kanishka Lad. The session was moderated by LIRNEasia Founding Chair and ICTA Chairman Prof. Rohan Samarajiva. Climate change During the discussion, Perwaiz posed the question of whether climate change is a threat to the Sri Lankan economy and stated that currently, they aren’t looking at disaster as a relief response issue but rather a development issue. He also pointed out that Sri Lanka experienced climate-related disasters annually since 2016, with 2017 being a year the country was truly tested as it experienced both floods and landslides that ultimately caused losses amounting to $ 468 million. However, Perwaiz stated that despite the various disasters experienced throughout the years, one positive about Sri Lanka is the fact that climate change and disaster management are mentioned in documents relating to the country’s economic state, while most other countries do not use disaster as an indicator for economic development. He explained that according to the “State of the Economy 2018” report on Sri Lanka, climate-related risks are a major factor, especially in the agriculture sector. The report also showed that annual aggregated losses due to natural disasters like floods, landslides, and cyclones amount to 0.5% of GDP (gross domestic product), or 3% of the Government’s expenditure. He stated that in the report, the breakdown by peril – i.e. exposure to the risk of injury, damage, or loss – shows that the costs are relatively high in the case of floods, primarily because of the way we manage water. “The hardest part about preparing for a disaster is overcoming human nature, like our own aspirations and the way we want to live and develop ourselves. This has been the problem all over the world. The context for me here is: Is the world sleepwalking into a crisis? Because, as global risk intensifies, the collective willing to tackle this appears to be lacking.” Perwaiz presented the Asia-Pacific Disaster Report 2019 by the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP), which showed that while being able to manage the loss of life, the economic losses have been on the rise in their many factors. He also explained that according to a World Economic Forum document based on a think tank perception survey, environmental risk is becoming more of a global risk in terms of impact and risk likelihood, so businesses are now making themselves prepared. “The document shows that from the years of 2009 to 2019, climate change environment risk is on the rise, and this is crippling the economy a lot. Climate change and environmental risk are not standalone risks that we as a community are facing – these are interconnected. I’ve also noticed that climate change can have cyber-related problems.” He explained that two-thirds of geophysical events happen in the Asia-Pacific region, with 70% of global mortality by disaster taking place in this region as well. Perwaiz went on to state that while the highest risk comes from climate change, several other key areas also pose a major threat to the Asia-Pacific region, i.e. global power shifts, technological risks, and economic fragility. He then explained that economic fragility gives rise to two major risks. The first is critical infrastructure failure and shortfall. This is the failure to adequately invest in, upgrade, and/or secure infrastructure networks, which include energy, transportation, and communication, thereby leading to pressure or breakdowns with system-wide implications. The second risk is talent shortage, which is the risk of companies being unable to recruit or retain people with the talent/skills sets they need to maintain/further develop their business operations to remain competitive in the market. According to Perwaiz, businesses affected by these risks, especially natural disasters, are vast. Taking the 2011 Thailand floods as an example, he explained that because the Toyota factory on the outskirts of Bangkok was damaged, operations even in the company’s factories in the US and assembly plants in Europe were stalled for more than two weeks. He explained that this was not the only business affected by the 2011 floods – 67% of the small businesses affected never returned. “Disaster has no boundaries; Sri Lanka is among the three most affected countries in 2017, estimated in terms of weather-related loss events, and ranks second highest on the Global Climate Risk Index, which measures total life and economic loss occurring as a result of extreme weather. Unlocking the resilience value for society and businesses and connecting them will help achieve good sustainable development in the country.” Security Former Sri Lanka Army Commander Gen. Senanayake spoke on the strategic relationship between economy and security. He explained that the relationship the two sectors have is due to the shared interest in helping the country reach its overall national interest. “Economy and security cannot be treated in two different lines; both share an equal responsibility to achieve national interest. “The national security policy of a country stipulates for essential interest towards national security, perceived threats, and possible vulnerabilities, which can be exploited and oppose any risk to national interest. The national security policy also covers economic security.” He went on to state that in the absence of a guaranteed and conducive security atmosphere, a country’s economy and other areas cannot flourish. Speaking from a regional security perspective, International SOS – the world’s largest medical and travel security services firm – Security Specialist Lad stated that even an organisation such as theirs, which primarily focuses on relying on response capabilities, has moved towards resilience. Lad spoke on the importance of pre-emptive planning, which according to him is the only way to achieve a reassuring response in times of crisis. He stated that the effects of only responding to an incident without resilience or preplanning can be multifold and affect various verticals of an organisation. Verticals such as finance can be affected negatively due to the increased cost of having an unplanned evacuation, and other verticals like human resources would be affected due to the major impact a crisis can have on employee morale. He explained that during crises, multinational corporations working out of vulnerable environments are put under the media’s glare, and depending on their preparedness will risk their reputation. This may lead to the corporation not being welcomed back into the location or the same concessions provided earlier not being provided in the future. “By being resilient, the organisation can be given a return on prevention and subsequently, a return on investment, while retaining solid duty of care practices.” Energy crisis During the panel discussion, Resource Management Associates (Pvt.) Ltd. Managing Director Dr. Siyambalapitiya pointed out that the energy crisis the country deals with is something that is largely manmade and was easily more predictable than any of the other looming disasters, including the potential climate change risk. Dr. Siyambalapitiya stated that the current energy sector of Sri Lanka is valued at $ 5 billion – $ 1.2 billion for electricity and the balance for the petroleum industry. According to him, the country can have the same productivity we currently experience for about $ 1.2 billion less. However, despite not managing the energy industry as well as other countries, he explained that the Sri Lankan energy sector has hope because the country’s per capita energy consumption is less than other countries with similar levels of economic development. “In my view, we are an energy-efficient economy in spite of all the difficulties we face, and perhaps, the high costs are also a reason we are conscious about efficiency.” Dr. Siyambalapitiya emphasised the importance of better managing resources to balance out both the supply and demand sides. Taking the transport sector as an example, he explained that it is currently shrinking, as less than 50% of trips are made via public transport, compared to 25 years ago when it was 80%. “We have a lot more to do to make sure our energy industry, both on the supply side and demand side, meets the challenges of the future. Climate change is only one aspect of it and the balance is all related to better management and the implementation of policies.” Food Speaking about the effects of climate change on Sri Lanka’s agricultural sector, University of Peradeniya Faculty of Agriculture former Dean and current Director – Agriculture Education Unit Prof. Marambe stated that to him, food security has a major role to play in national security. He stated that the agricultural sector of the country is still struggling due to climate change, despite efforts being made to revive the sector. Prof. Marambe stated that the agricultural industry heavily depends on external factors like rain to ensure its growth. Taking rice production as an example, he explained that in 2015, the growth rate of rice production was the highest its ever been with 4.8%, but the years that followed – 2016 and 2017 – were disastrous with a growth rate of -4.2% and -0.2%, respectively, due to failing rainfall. He went on to state that the growth rate did not come back to 4.6% until 2018 because of that year’s extensive rainfall. “External factors determine our agriculture sector, and while agriculture is not the only sector to ensure our food security, it is a strong and significant contributor.” He went on to attribute the survival of the Sri Lankan agriculture industry to the researchers, farming communities, and practitioners who adopt new technology. He stated that 98.6% of the current cultivated extent is with new and improved varieties bred by the country’s own scientists. Despite the adoption of new technologies, Prof. Marambe stated that we still haven’t been able to tackle the biggest problem that is climate change. He also stated that if the country is to achieve its goals for 2025 or 2030, climate change has to be dealt with. “What we need to keep in mind is that climate change is real and is a part of our future, and it’s happening at an unprecedented rate.” Insurance National Insurance Trust Fund (NITF) of Sri Lanka CEO de Silva spoke of how best to take care of the public of Sri Lanka, stating that insurance is a mode of bringing down the economic losses people face during a crisis. He explained that this was the case in 2016, when NITF observed the extreme weather conditions in the country and launched the national natural disaster insurance scheme to protect the uninsured houses, small business, and lives of people in small communities, like fisherman and farmers. He explained that during the last few years, the NITF paid more than Rs. 6 billion in claims from the national natural disaster insurance scheme in order to help sustain the most vulnerable communities in the country. He went on to state that the NITF also had a national agriculture insurance scheme, where they pay Rs. 10,000 per acre of paddy field land. De Silva stated that when it comes to climate change, the variations of the effects differ, so the key is being able to manage those variations economically and individually. “From an insurance perspective, it’s about more than just making a profit – it’s about bringing back the losses that happen during a crisis and trying to make the situation better. The only thing we cannot bring back is life.” Achieving economic resilience is the best way to ensure the economy is not crippled by every major shock it faces and is able to weather the storm and keep moving forward despite challenges. After all, while shocks are uncontrollable, their impact is not. By now, Sri Lanka should know this better than most countries. As a country, it is imperative that we work towards a stable economy and have favourable government policies – all of which will help improve investor confidence.