Economic and social development created rubber industry benefits to the society

There are two basic ways that the rubber industry creates benefits to the society. First is through the economic and social development created by its value chain activities in upstream and downstream segments. Second is through the value created for human society by offering countless different products that are indispensable, so said Minister of Plantation Industries Navin Dissanayake today.

Delivering the Keynote Speech at the IRSG World Rubber Summit held at the Colombo Taj Samudra Hotel the Minister also said that Our theme today is sustainability. Rubber production segment can promote sustainable development through carefully managed value chain processes, in plantations, smallholdings, factories and trading houses. Each of these can potentially provide benefits to individuals, communities and countries. Benefits include stable employment, public infrastructure, export earnings, building of human capital through training, government revenues, increased opportunities for related and supporting industries, and the like.

In his address Mr. Dissanayake also added that They can often provide these things in countries or regions that have little success attracting any other kind of economic activities. That is why we have a group of natural rubber producing countries working together seeking ways to keep rubber producers in the business of rubber production.

The Keynote Speech is as follows:

Greetings

Government delegates, other members of the IRSG, Secretary General and his team, Her Excellency Elizabeth Sophie Balsa, Ambassador of Brazil and Counsellor Bruno, Senior Industry Leaders, Distinguished Invitees from the government and the private sector, Secretary MPI and other senior officials, all other participants…(I haven’t got the full list of VIP invitees)

I am indeed delighted to address this eminent and powerful gathering of global rubber industry players who collectively manage an expanding industry with an estimated sales value of over 400 billion, spread all over the world from the South Pole to the North Pole. It provides livelihoods to countless millions across the globe, mostly to rural poor. Its outputs satisfy myriad needs of billions of consumers who use countless types of rubber products which are ubiquitous. I, therefore, thank the organizers for giving me the pleasure of delivering the keynote speech at this very important summit.

There are two basic ways that the rubber industry creates benefits to the society. First is through the economic and social development created by its value chain activities in upstream and downstream segments. Second is through the value created for human society by offering countless different products that are indispensable.

Our theme today is sustainability. Rubber production segment can promote sustainable development through carefully managed value chain processes, in plantations, smallholdings, factories and trading houses. Each of these can potentially provide benefits to individuals, communities and countries. Benefits include stable employment, public infrastructure, export earnings, building of human capitalthrough training, government revenues, increased opportunities for related and supporting industries, and the like. They can often provide these things in countries or regions that have little success attracting any other kind of economic activities. That is why we have a group of natural rubber producing countries working together seeking ways to keep rubber producers in the business of rubber production.

Additionally, the rubber industry creates thousands of value added products that are necessary to human wellbeing and to almost all forms of economic activity. These products are an essential basis for meeting all kinds of human needs as long as humans survive catastrophic climate change or another calamity.

Being a public leader with increasing responsibilities, and the IRSG essentially being an inter-governmental organization, I am pleased to share some of my thoughts, concerns and suggestions with you to stress the desirability of collaboration, communication and collective action to resolve some of the sustainability issues facing the rubber industry. My main focus is the natural rubber production segment of the rubber value chain which primarily is a people’s industry. My major concern, therefore, is our people’s prosperity and stability which are crucial variables in your sustainability equation, I presume. Of course, the significant contribution to our national economic growth is also important to be considered as the rubber plantation industry consumes our scarce resources like land and human capital which has opportunity costs, unlike in early 1990s when rubber was introduced, while the manufacturing sector impacts the environment as well. Overall, rubber is a good industry to be supported and sustained but we cannot take things for granted. There are some concerns and issues to be addressed.            

Theme of this summit, which essentially is an open discussion platform, is Removing Barriers towards Sustainable Growth. It sounds appealing and relevant. Sustainable development is a concept that has been evolving for over fifty years. This initiative has passed important landmarks such as The Stockholm Declaration 1972, Rio Earth Summit 1992, "Rio+10" in Johannesburg 2002 etc. and the most recent being the ambitious Paris Agreement ratified in 2016. Reactions of world leaders are not uniform though, some give strong support with actions while another taking a different view. In such a context, it is very opportune that the IRSG has taken this initiative with the commitment of its members to make the rubber industry a sustainably growing industry. By organizing this summit, the IRSG contributes to the formation of a body of international requirements related to sustainability of rubber. International standards are emerging as the industry players and countries concerned have realized the need.

Although the initiative is laudable, I have a few questions to ask. I am not a doubting Thomas but being a Western trained lawyer I do not accept anything on face value but attempt to get the relevant facts right before taking up a position. That is important before policy decisions are made. So, let me explore your views.

What is sustainable growth: What exactly is sustainable growth relevant to this complex, or rather multiplex, global rubber industry value chain? Are we on the same page as far as the definition and final oals are concerned? I do not want to pretend to know and need a precise answer from those who know.

For whose benefit: For whose real benefit are we trying to break the barriers to sustainability? A value chain has many links, direct links as well as crossed links according to theory, and would the players in all links benefit equally? How does it benefit the wider industry cluster players connected? In a country, any competitive industry is supported by a sub set of related and supporting industries, according to Prof. Michael Porter. In Sri Lanka too, rubber industry is dependent on such a network of supply, service and knowledge industries.

Equity and fairness in gains sharing: Rubber industry comprises of numerous players from raw material suppliers, products manufacturers and end users. There are many in between and around. Can we share sustainability gains equitably and fairly among them? Who will discover and determine the conditions of fairness? Free market forces, self-imposed industry regulations or government fiat? Are free market forces capable of acting fairly? Why then economists and policy makers talk about market failures and need for regulations and interventions? Remember the catastrophic Wall Street meltdown in 2008 and the reaction of the US government?

Profit driven corporates: I am sure our big rubber companies have shareholders behind whose mantra is profit maximization and increased shareholder value. They are so big and for example the sales of five largest tire companies in the world together exceed the GDP of Sri Lanka. Bridgestone has sold tires worth over USD 30 billion in 2017, close to a third of Sri Lanka’s GDP. What is their role in assuring sustainability? They are on top of the value chain and can act from a position of strength.  

Ethical behavior vs regulated behavior? Are those big or small businesses always moral and ethical? They exist to serve customers, make money and enrich shareholders. Most of them wear blinkers when racing for success and go to extremes unknowingly. In such a scenario regulation is necessary to define acceptable standards of conduct in a fiercely competitive world and to ensure that those standards are vigorously upheld. Regulations also could protect businesses from themselves, like safety rules and sometimes as safety valves. How do you mix and balance ethical sustainability standards with effective regulations, surveillance and remedial action?

IRSG’s Sustainable Natural Rubber Initiative: This voluntary and collaborative industry led initiative is over a couple of years into action and is a stepping stone for a broader program. A considerable volume of rubber is said to be channeled under this standard. It seems that the IRSG is thinking of making this a mandatory requirement to satisfy certain similar private initiatives. Is this initiative really demand driven and popular among all industry players? For example, a rural woman smallholder in our newly developed Moneragala region which received intense government support to develop her hectare of rubber may have never heard of SNR-i. Are supposed to adhere to these guidelines? Is it only for corporates? If so, what is its impact at the grass-root levels?      

Taming market forces: I am not a market fundamentalist. I am here today because I am a pragmatist who value realities, in politics as well as in other human endeavors. When I was reading for Law at University of London, I remember coming across an unforgettable statement made by an economist, sorry I cannot recall the name, “Market forces are great, until they are not!” What a revealing truth! So, you may break barriers of sustainability but how would you tame these wild market forces? What is the role of regulations in sustainability? Morally driven self-regulation would be thousand times better than state regulation, I would recommend. I am a fan of the game of Cricket, so who will be the umpires? We know who the players are. Is self-regulation feasible? Remember collusion is not self-regulation.          

Rubber and climate change: Rubber industry depends on transport and automobiles. Sixty percent of fossil fuels are used in transport. Three quarters of global greenhouse emissions come from burning fossil fuels. Has anyone made attempts to make fossil fuels less attractive for consumption, by imposing penal taxes? Of course we do this in Sri Lanka but use the money to buy dirty coal to fuel power plants so eco-friendly electric cars can use cheaper electricity! Anyway, how do you resolve the paradox of growth of automobile industry with sustainability of rubber industry? There is no doubt that the growth of all types of automobiles that largely run on fossil fuels will sustain the huge rubber based automobile component industry including tires.  

Technology and profits: At present, natural rubber producers try to confront the problem of low yields. If disruptive technologies play wonders and natural rubber producers will reach productivity levels of say, 3000 kilograms per hectare per year by 2040, on average at half the current cost of production with promised automated tapping and troubling plant diseases fully eradicated, what will be the resulting global production volumes and ensuing price level? You suggest that higher productivity and lower costs brings more profits. I am not sure if the profit is increased per kilogram or per hectare but what happens then? How does it affect the demand curve? Let us see.

Reactions to profits: Businessmen will start investing in rubber. Shrewd politicians will take notice. Land grabbing begins. Rent-seeking is possible. Governments will offer all kinds of support for a cash cow. Our people will open more rubber farms or replant rapidly expecting to enrich faster. Increased output will impact the supply-demand equation. The resulting glut will obviously make natural rubber cheaper but will the prices reach and remain at constant fair equilibrium? Will the price fluctuations stop? Will the interest in developing alternative natural rubbers such as Dandelion remain? Will the glut have an impact on synthetic rubber markets? We have here synthetic rubber producers and consumers. What is their reaction? Will there be production controls by natural rubber cartels led by governments influenced by private interests like OPEC that may never succeed?

I do not know if we could predict future scenario accurately and find answers to the questions that came to my mind over the last few days. However, we must look at the realities that we are confronted with before embarking on an ambitious program like the one promoted by IRSG. Perhaps, IRSG experts have analyzed all scenarios and convinced. Not the ordinary folks who will be affected by your action.

Let us be prepared. We are entering an era of upheaval as well as surprises. Look at the political shifts that take place in a rapid pace, in regions like Korea, in the US. Business minded farsighted leaders in China and India are building an enduring partnership suggesting economics drive politics or commercial realpolitik. China’s ascendance as an undisputed economic super power and a stable prosperous nation led by a reelected President is another factor with global impact. See the potential impact of Belt & Road Initiative which has catalyzed similar programs elsewhere. It is a watershed program, a logistical backbone of a future economic world that goes beyond infrastructure and which would create, integrate grow sustainable supply and value chains. It will certainly lead to the next industrial revolution. Today, Schumpeter’s theories about creative destruction by disruptive technologies come real with advancements in biotechnology, IOT and robotics. Rapid conversion to automation will transform business models, relevant task environments and human involvement. Although some may disagree, an energy revolution is taking place silently making switch over to renewables unstoppable. Some are of the view that there will be no energy shortages except the problem of unabated pollution due to increasing use of fossil fuels.

Climate change and unpredictable weather patterns will impact rubber producers and businesses alike, making populations vulnerable and value chains dysfunctional resulting heavy losses and social unrest. Fortunately, President Xi Jinping favors sustainability measures while some world leaders have looked the other way. Sustainability also has led to reporting climate related risks compelling transparency in multiple business practices. Public consciousness of sustainability issues in a context of apathy of political leaders will compel the business leaders themselves to lead sustainability initiatives, adapt or leave their businesses. The impact of climate change on rubber production is increasingly reported but effective solutions are slow to emerge.

In such an unpredictable changing context, the proposed initiative augurs well for the rubber industry growth. Consider all aspects of it carefully and allow the industry players who know the industry intricacies to take the lead in identifying sustainability barriers, determining strategies and implementation mechanisms. Governments should become partners by providing policy support and institutional backing. Let us think collaboratively and derive the benefits of Synergies of Sustainability across the rubber industry value chain.

Ground Realities

Leaving poverty trap: There are certain realities with political dimensions that I am concerned with. One such reality is that the poor and vulnerable small rubber farmers are not going to listen with admiration to a policy that compels them to remain poor to keep sustaining global value chains. Participants in a sustainable rubber industry must enjoy increasingly improved standards of living in a sustained manner, in tandem with the rest of the population, with equally fulfilled social aspirations. Bottom of the value pyramid must be our main focus.

Concern for environment: The poor citizenry is also worried about their own environments when disturbed by big businesses. In Sri Lanka, we have an ongoing debate about replacing rubber with oil palm. The ordinary man perceives (perception = reality) sustainability in a way that is related to his own environment and livelihood needs. The affected citizenry will ask industry players to describe, explain and justify their approaches to these issues. This suggests that there is some set of articulated expectations. Basically, don’t disturb the status quo, they appeal.    

Participatory problem solving: Production of rubber is essentially a local business and affects the local population, both positively and negatively. However, there is a link between international business and local production system. The local production system is ultimately dictated by the international business and the local population is unable to set standards of behavior. Are there any representatives of local populations attending this Summit? Are you prepared to listen to the non-state actors who work with the local folk? How do you make this an inclusive process? Do we assume that governments represent their views adequately and fairly?

Relevance of Government Interventions

There is this mistaken belief of many governments, especially the politicians, that cushioning the impact of market vagaries faced regularly and cyclically by small farmers through various intervention measures such as subsidies, free farm inputs and income support is essential to the welfare of them. Governments maintain costly structures to implement these measures. It seems that this populist belief is unsustainable, counterproductive and helps only the consumers to procure rubber at an artificial price thus indirectly subsidizing big businesses. Does the industry bear the cost of subsidies directly or indirectly? I see no evidence.

Brazil on a Different Path

In this regard, I appreciate the views held by our Brazilian colleagues that they are on a path to produce rubber in a truly sustainable manner by preventing the commoditization of rubber through certification and managed expansion. Sustainability is not about supporting an inefficient producer. It is about developing a self-sustaining generation of producers who can weather the markets on their own with adequate resilience.  

Diminishing Role of Government

I am sure global rubber consumers assembled here under the aegis of IRSG would collaborate with their counterparts in governments to find a solution, a kind of solution that enables rubber farmers to leave the government out of their equation except as a fair and transparent regulator, a respected umpire. Ideally, there should be no subsidies, no incentives and no bureaucracy overlooking the affairs of rubber production. I reckon Brazil is moving in that direction, away from unproductive populism. I am sure they are going to share their views with us.

Rubber is a global value chain with huge consumer value and with a progressive history over a century and I fail to understand the role for governments in its sustenance any longer. This well established industry itself must take over its future destiny, governance, and well-being of its actors whether they are smallholders or corporate giants.  

Corruption and Sustainability

The question of the impact of corruption on sustainability is another issue. When subsidies and other forms of government assistance or regulation are involved in sustaining an inefficient production system, there exists a possibility of corruption creeping in. This obviously will have an impact on efficiency and resource allocation. I do not know how this assembly would look at this issue but I think in developing countries, it is a matter for great concern.

Future Prospects

As a public leader and a policy maker I have some concerns with the economic prospects and future of rubber production. I have no issue at all with natural rubber, a wonderful versatile material. Rubber forests are pleasing to the eye and sustain the ecological balance while leaving rubber-wood with us, a fine material of high value. Raw rubber feeds a huge value added industry and some experts say that by 2025, the world would need 17 million tons of natural rubber. IRSG prediction may me different but the world needs more rubber from a renewable source.

My problem, in Sri Lanka, is the long time taken by a usual rubber tree to produce latex in profitable volumes. A small farmer cannot wait for 7 to 10 years after converting his small farm, the only asset he owns, to get adequate returns. Even large investors with other options may think twice. Arable lands are in high demand in Sri Lanka now. Especially in the wet rubber growing regions where other agricultural crops can be planted with better returns. One example is Oil Palm. I know that there are other plants and crops that can produce natural rubber in commercial quantities and millions of dollars are being invested in R&D to promote commercial applications. Our neighbor India also has joined.

So, what are the true future prospects for Hevea brasiliensis with competition emerging? Can we sustain it from an economic perspective? In theory, rubber can be made profitable. In practice, most of our producers are unable to do so unless the prices are high. That is the reality and as policy makers we have to make pragmatic decisions that are fair to all. I hope the two days deliberations would uncover solutions to this dilemma.

The World has come together

I see participants from all parts of the world. Rubber producers from Asia, Africa and South America are present here agreeing to share views and learn from each other. No region should look at the other region with suspicion or be critical about the local policies. Every country has its own reasons, social, economic or political that leads to a particular decision. However, with open and sincere dialogue, we may find better ways to become sustainable and profitable. Let us share our knowledge as well as opinions generously to help each other.  

A Challenge

I wish to quote one famous remark of Adam Smith, who is still relevant to the world today.

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices”

I hope you are going to challenge Adam Smith’s observation. So, at this stage, some intervention or oversight may be necessary to prevent industry benefits from self-regulation without providing real social benefits. One can create misleading programs and substitute great feelings for good action. My final question: is there a case for government intervention and oversight in breaking sustainability barriers? If IRSG does its job well, we who come to power and run governments can focus on our main trade, i.e., politics. Not the theories but only realpolitik helps politicians to break barriers in their forward journey and be sustainable. Be pragmatic, my keyword.