Export industrialisation: Development of resilience for Seychelles |28 May 2020
The Seychelles economy is facing unprecedented downturn during this COVID-19 pandemic. In less than three months when most economic parameters seemed to be on target and another record tourism year, relatively good returns from fisheries, manufacturing and positive GDP growth, suddenly and rapidly our principal pillar (tourism) collapsed with the closure of international borders, foreign currency earnings fell to critical levels, unemployment is at its highest, inflation continues to spiral upwards, business uncertainty is at its highest, government deficit is in high gear and the economy is on course to enter into a deep-troughed recession. And the prospects for recovery can only depend on what epidemiologists predict in terms of the development and global application of a vaccine to combat the pandemic.
The catalyst for what we are going through is the COVID-19 situation but the country’s heavy reliance on tourism as the main economic pillar, generator of foreign currencies and employment has been the pivot that tipped the economy into this precarious downturn. The multiplier effect of the fall in tourism will scar the economy and dent its finances for many years! How to finance future budget deficits during the recession is another challenge that government needs to contemplate.
David Bianchi, an economist, assesses the situation and he thinks that the country urgently needs to develop other activities that generate foreign currencies in order to sustain itself as an import-dependent nation.
David, who holds a Master’s Degree in Industrialisation, Trade and Economic Policy, thinks that developing an extensive export-oriented manufacturing base holds one of the keys to a more sustainable, more diversified and long-term stability in foreign currency reserve, inflation and in the macro-economy.
David wrote his thesis in 1998 and says “reading my paper makes a lot of sense in the context of what is happening today in the country”. His thesis entitled ‘Prospects for Development of Small Economies with Particular Reference to the Seychelles’ outlines the different options of industrialisation that small economies might choose.
Producing to replace import or import substitution industrialisation, in his opinion, has not proven to be an effective long-term strategy in most countries that tried it. It enriches the businesses involved and generates tax revenue to the government and some employment but the price paid by consumers for the commodities produced domestically are generally above what they should normally be. In the case of Seychelles, the small domestic market does not provide the scope for mass production, trade and economies of scale. Therefore, there is a tendency for cost of operation and price to remain relatively high.
In his thesis, David advocates an export-oriented industrialisation programme for Seychelles that can contribute to solving many of the challenges and limitations that our economy faces. He explains that it will provide avenues for diversification by producing different products and reduce the risk should one or two sectors fail. High value manufacturing or assembly for export allows for economies of scale and cost and price reduction as the industry has the vast world markets to cater for, provided the marketing strategy is right. It can contribute to lowering the cost of living because more receipts of foreign currencies in the domestic banking sector increases supply and therefore, lowers the exchange rate and thus the rupee prices of commodities in the shops. Manufacturing promotes technology transfer and innovation more than services such as tourism and contributes to the propagation and use of technologies for wider progress in society as a whole.
Many will question whether industrialisation is a viable option for Seychelles given the high cost of transportation and the need to import all basic raw materials. David thinks that if one puts in the right framework, dedicates adequate resources and effort it can indeed be a viable option because “we already have a working example. The Indian Ocean Tuna Company (IOT) has been exporting for many years. We need to look at the existing framework under which IOT operates to see how we can develop the same or a hybrid of this framework for other companies”.
“It takes time and effort, but if the willingness is there, if we put in the right formula it will happen. Some countries have taken decades and even centuries to arrive at their present level of industrialisation. Today we have the benefit of hindsight to learn from the mistakes of others, we have the internet and least cost technologies that can enable even the smallest of economies to start at a high level of efficiency and competitiveness in order to trade to the major export markets,” he says.
David continues, “In fact, if we develop a good framework, if we up the ranking of Seychelles in the ‘Ease of Doing Business’ listing, if we make it easier and reduce the cost of doing business such as the availability and cost of working premises, availability and cost of finance (e.g. lower interest rate), price of raw materials and link the cost of labour to productivity and make the economy more cost competitive and if we select to produce goods and items with high income elasticity of demand, I do not see why we cannot succeed. High income elasticity is a prerequisite because demand for the items produced in Seychelles and our exports will continue to be strong when incomes in other countries rise. This has net positive impacts on the country’s terms of trade and balance of payments in the long run.”
He believes that the high cost of transportation which is a factor to consider is likely to fall if there are sufficient volumes.
“Presently, the cost of shipping is relatively high because of the small volumes that the country imports and exports. Many shipping containers that arrive in Seychelles full are re-exported empty. If we can fill them with high value manufactured goods, processed blue economy products, etc… we can generate some money to help pay for the cost of shipping. With an extensive manufacturing sector that generates more volumes in the importation of raw materials and export of finished, semi-finished goods or component parts, I can foresee potentially reduced shipping costs.”
David adds that just like the country has developed a ‘Seychelles Brand’ to market Seychelles as a tourism destination (export of a service) where visitors are prepared to pay a small premium (higher price) to come on holidays, some form of a similar Seychelles branding can be considered for our manufactured exports. The premium can also partially help to pay the shipping cost.
Seychellois must be prepared to take the challenges and take up business (wholly or partially) as well as employment opportunities as much as possible that an industrialisation programme will create. It will be sad if a very high percentage of business ownership and jobs are taken up by non-Seychellois because then most of the benefits will go to other countries such as a high proportion of the foreign currencies through profit and salary repatriation. In view of the high initial investment risks and required capital, government might have to participate temporarily and eventually shed its ownership to the private sector.
Seychelles needs to consolidate and be more innovative in its present economic activities of agriculture, fisheries, tourism and financial services and try to gear them into higher value generating sectors. The country needs to revisit the original idea of the SITZ as an economic area for high value addition. If need be, the SITZ framework should be recalibrated into a more win-win business setting to respond to the economic challenges of the day and with an export objective. However, diversification into industrial manufacturing and high value addition for export must remain a serious consideration in view of the significant real benefits that it can bring to the country. Foreign currency earning must be the talk of every day. A healthy foreign currency reserve will facilitate import, exchange rate will be reasonably low and therefore, prices of goods in the shops will be stable, there will be micro and macro- economic stability which is a fundamental prerequisite for sustained growth and prosperity.
On this occasion, it is a public health issue that has brought the world to its knees but next time it will be something else with perhaps more severe economic consequences for Seychelles and one has to be ready for all eventualities. The country has to continue to find ways to build its resilience and cushion its fragility and vulnerability against any shocks that the world will throw at us. Industrialisation for export provides one such opportunity.
Contributed