Based on the criteria of the factor endowment structure of state-owned enterprise (SOE) sectors in China between 1980 and 2018, this paper rationalizes the classified reforming of China's state sectors by constructing a Nash bargaining model to capture the dynamics of ownership restructuring, and the reduction process of policy burden on SOEs. We reveal that the interplay between policy burden bared by SOEs and the ownership restructuring process largely depends upon their factor intensities since the reform period in the 1980s. Our model identifies two Ownership Reform Irrelevance Points (ORIP), which serve as the benchmark for the dynamics of the ownership restructuring process of China's large SOEs, which saw them move from ‘mixed-ownership’ to ‘privatization’. ORIPs demonstrate the need for a reduction in social policy burdens with regards to the state sector's comparative advantage of factor endowment structure through SOE ownership restructuring. This study theoretically analyzes existing literatures on the classified reforms of China's state sectors from 1978 to 2018. This study is the first to base such an analysis on the criteria of factor endowment structure focusing on the connection between the policy burdens bared by SOEs and their ownership restructuring process.

Following the Russian aggression against Ukraine, major sanctions have been imposed by Western countries, most notably with the aim of limiting Russia’s access to hard international currency. However, Russia remains the world’s first exporter of oil and gas, and at current energy prices this provides large hard currency revenues. As the war continues, European governments are under increased pressure to scale-up their energy sanctions, following measures taken by the United States, the United Kingdom, Canada and Australia. This piece argues that given the inelasticity of Russia’s oil and gas supply, for Europe the most efficient way to sanction Russian energy would not be an embargo, but the introduction of an import tariff that can be used flexibly to control the degree of economic pressure on Russia.

E-Letter in Science: How to weaken Russian oil and gas strength

Kazakhstan has achieved many of its goals and faces enormous opportunities. It has been able to transform itself into a market economy, thus unleashing the productive capacity of its citizens and creating the conditions for the country to benefit from international trade and investment. In addition, it has discovered large quantities of oil reserves that will allow it to sustain a tripling of oil production in the next two decades.

Under these conditions, the recent performance of the economy has been characterized by rapid growth with declining unemployment. The economy has been propped up by increased fiscal spending and by private investment. Macroeconomic management has been prudent in the sense that inflation has been kept low, the government has accumulated significant fiscal savings in the National Fund and the Central Bank has built up a significant stock of international reserves. The question is how to make this situation last over the medium and long term and how to make the economy resilient to the shocks that may come.

This report is a collection of policy memos that deal with the choices the government faces going forward in the broad area of macroeconomic policies, including fiscal policy and institutions, monetary and exchange rate arrangements and policies, financial policies, industrial policy, trade policy and broad issues in institutional development.

Throughout 2016, CID conducted a growth diagnostic analysis for Sri Lanka in collaboration with the Government of Sri Lanka, led by the Prime Minister’s Policy Development Office (PDO), and the Millennium Challenge Corporation (MCC). This presentation report aggregates collaborative quantitative and qualitative analysis undertaken by the research team. This analysis was originally provided to the Government of Sri Lanka in April 2017 in order to make available a record of the detailed technical work and CID’s interpretations of the evidence. A written executive summary is provided here as a complement to the detailed presentation report. Both the report and the executive summary are structured as follows. First, the analysis identifies Sri Lanka’s growth problem. It then presents evidence from diagnostic tests to identify what constraints are most responsible for this problem. Finally, it provides a summary of what constraints CID interprets as most binding and suggests a “growth syndrome” that underlies the set of binding constraints. 

In brief, this growth diagnostic analysis shows that economic growth in Sri Lanka is constrained by the weak growth of exports, particularly from new sectors. Compared to other countries in the region, Sri Lanka has seen virtually no diversification of exports over the last 25 years, especially in manufactured goods linked through FDI-driven, global value chains. We found several key causes behind this lack of diversified exports and FDI: Sri Lanka’s ineffective land-use governance, underdeveloped industrial and transportation infrastructure, and a very high level of policy uncertainty, particularly in tax and trade policy. We believe that these issues trace back to an underlying problem of severe fragmentation in governance, with a critical lack of coordination between ministries and agencies with overlapping responsibilities and decision-making authority.

In August 2016, the Government of Sri Lanka (GoSL) and the Building State Capability program of CID convened five teams of civil servants, tasking them with solving issues related to investment and export promotion. One of these teams, the “Targeting Team,” took on the task of formulating and executing a plan to identify promising new economic activities for investment and export promotion in Sri Lanka. With the assistance of CID’s Growth Lab, the Targeting Team assembled and analyzed over 100 variables from 22 datasets, studying all tradable activities and 29 representative subsectors. Their analysis highlighted the potential of investment related to electronics, electrical equipment and machinery (including automotive products), as well as tourism. Ultimately, the team’s recommendations were incorporated in GoSL strategies for investment promotion, export development, and economic diplomacy; extensions of the research were also used to help plan new export processing zones and target potential anchor investors.

This report summarizes the methodology and findings of the Targeting Team, including scorecards for each of the sectors studied.

In 2018, the Growth Lab team turned attention to diagnosing growth problems at the subnational level. The Prime Minister of Sri Lanka requested that the team start with the North Central Province, which had been experiencing recurring droughts, which had in turn been affecting national rice production. This presentation summarizes what the team found and presented to a local university in the North Central Province in September 2018. People in the province had long been working to escape from the vulnerability and low income levels of rice farming and the diagnostic found important areas for national-local coordination to support pathways to a stronger, and more connected, local economy.

Many countries, like Sri Lanka, are trying to diversify their economies but often lack thecapabilities to lead diversification programs. One of these capabilities relates to preparing the investment climate in the country. Many governments tackle this issue by trying to improve their scores on ‘Doing Business Indicators’ which measure performance on general factors affecting business globally (like how long it takes to open a business or pay taxes). Beyond these common indicators, however, investors face context specific challenges when working in countries like Sri Lanka that are not addressed in global indicators. Governments often lack the capabilities to identify and resolve such issues. This paper narrates a recent initiative to establish these capabilities in Sri Lanka. The initiative adopted a Problem Driven Iterative Adaptation (PDIA) process, where a team of Sri Lankan officials worked with Harvard Center for International Development (CID) facilitators to build capabilities over a six-month period. The paper tells the story of this process, providing documented evidence of the progress over time (and describing thinking behind the PDIA process as well). The paper will be of interest to those thinking about the challenges associated with creating a climate that is investor or business friendly and to those interested in processes (like PDIA) focused on building state capability and fostering policy implementation.

Sri Lanka has an excessively complex tariff structure that distorts the structure of the economy in important ways. It is a priority for the Government of Sri Lanka (GoSL) to rationalize the system in order to facilitate a transition to greater economic diversification, stronger export growth, and the emergence of new, higher paying jobs. Sri Lanka’s New Trade Policy makes this tariff rationalization a priority. It also recognizes that tariff rationalization should go hand in hand with new trade adjustment assistance measures to support the adjustment of firms and of people. The New Trade Policy outlines the basic contours of tariff rationalization and trade adjustment assistance measures but does not provide a detailed roadmap.

This discussion paper was prepared at the invitation of the Ministry of Development Strategies and International Trade (MoDSIT) as part of the Center for International Development’s research project on sustainable and inclusive economic growth in Sri Lanka. The aim of the paper is to study policy tools that the GoSL could use to structure trade adjustment assistance in the context of tariff rationalization. In order to accomplish this aim, we begin by outlining the type of tariff rationalization that needs to take place in order to address key constraints to growth in a way that is sensitive to both government revenue needs and political economy considerations. We stress that tariff rationalization must be approached in a holistic way that treats the various tariffs and para-tariffs as interrelated, rather than an approach that attempts to address one part of the system at a time. A holistic approach would provide many degrees of freedom to solve the underlying problems in the system while increasing revenues and potentially generating strong public support. Critically, a holistic approach would allow for a single tariff rationalization plan to be phased in over a period of years in a predictable way, whereas attempts to rationalize the system one part at a time would lead to extreme uncertainty.

With the principles of smart tariff rationalization in place, we draw upon international lessons and Sri Lanka’s own institutional capabilities to recommend a two-tiered approach to helping industries and workers adjust. In each case, the first tier represents low-cost measures that can begin in the short term to help industries and workers, regardless of whether they will be negatively impacted by tariff rationalization, while the second tier of assistance applies only to trade-affected industries and workers and can be developed in the medium term. For industries, Tier 1 support involves the use of an innovative process of public-private problem solving of industry-specific constraints, and Tier 2 support involves the use of special safeguard measures to provide an objective and transparent process for determining which industries require longer phase out periods for tariff reductions versus the tariff rationalization plan. For workers, Tier 1 support involves improved access labor market information and training opportunities through the development of regional (or local) job centers. Tier 2 support provides government funding for training and job placement services. We conclude that this package of trade adjustment assistance measures could be used to complement a holistic tariff rationalization plan. But we caution that attempts to rush the implementation of these measures without careful design and communication could deeply undermine the potential for the reforms to work in solving underlying economic problems.

In August 2017, CID began focused work with Sri Lanka’s Ministry of Primary Industries (MPI), specifically with their Agriculture Sector Modernization Project (ASMP) team. MPI requested Harvard assistance in the analysis of constraints and opportunities in the agriculture and fisheries sector, specifically in non-plantation, export-oriented activities. As a first step, CID worked with MPI research officers to compare the more than twenty agricultural and fishery subsectors being considered under the ASMP. These subsectors were analyzed across over 53 quantitative and qualitative variables, measuring market demand, feasibility, current strength, and poverty considerations. The analysis ultimately identified spices (especially pepper), aquaculture (especially shrimp) and plantains and bananas as especially promising subsectors for future research and ASMP activities. More broadly, the analysis identified the basic market and feasibility considerations that can provide a starting point for value chain analyses and public-private strategic planning. This presentation was prepared jointly by MPI project officers and CID Growth Lab researchers in order to inform MPI initiatives, both within the ASMP and beyond.

Insufficient export diversification is a binding constraint to economic growth in Sri Lanka

• The Harvard CID growth diagnostic found that with wages in traditional export sectors now below average Sri Lankan wages, new higher-wage export industries are required

Overseas Sri Lankans (OSL) have the potential to create new export industries in Sri Lanka

• Diasporas were involved in the export-led development of India, Taiwan, and China by bringing industry knowhow and market connections to their home countries
• There are large, well-educated OSL communities living in the US, UK, Canada, and Australia that have the industry knowhow to assist in export-led growth in Sri Lanka

OSL can have the biggest impact on diversifying exports if they return to start firms in new export industries rather than working with firms while based overseas

• OSL can play a useful role connecting the existent Sri Lankan IT export sector to overseas markets, but they cannot start firms in new export industries from abroad
• If OSL return to start firms they can “seed” a new export industry that grows organically through the diffusion of knowhow
• The pharmaceutical sector is an example of an industry with high potential to be “seeded” by returning OSL entrepreneurs

Preliminary policy recommendations focus on removing barriers and catalyzing latent motivations to facilitate OSL return entrepreneurship:

• The Department for Immigration and Emigration should continue to ease border processes for OSL through dual citizenship and the OSL lifetime resident visa
• The Board of Investment should orient part of its “one-stop-shop” to dealing specifically with OSL issues
• The Ministry of Foreign Affairs should utilize its diplomatic network to engage potential OSL entrepreneurs to catalyze latent motivations to return

*This is an edited version of a Policy Analysis written in fulfilment of the requirements for the degree of Master in Public Administration in International Development, John F. Kennedy School of Government, Harvard University