The show is over — clowns leave the stage!

by Analyst
What is wrong with those Third World countries that continue to stagnate with mass poverty and unemployment is highlighted by the political practices of the PA government. Parliament is dissolved and the President, the Head of State, has called a general election.

The government immediately thereafter proceeds to hand out giveaways in the budget for the year already passed by Parliament at the beginning of the year, a budget formulated on the basis of macro-economic indicators, which have deteriorated drastically since then. Salaries of public servants are to be upped by Rs. 1,200 and the pensions of retired government servants increased by Rs. 750. The diesel tax is abolished widening further the economic subsidy on diesel over petrol, encouraging more uneconomic traffic congestion on the roads and promoting more pollution and also dissipation of the foreign reserves.

The National Defense Levy is being reduced by 1% although the war is with us and needs greater defense expenditure at least to maintain the defense budget in real terms with inflation running at 13%. According to ex-Deputy Minister of Finance G. L. Pieris, all this is to cost an extra Rs. 11 billion but nary a word from the President about how this expenditure is to be funded. The public should demand from the government to let them know how the funds are to be raised?

Dangerous populism

Printing new money through borrowing from the Central Bank is not acceptable since it will erode the extra monetary benefits through higher inflation. It constitutes a fraud on the public servants and pensioners. But this economic chicanery will also put the economy in peril. It will worsen the balance of payments and deplete the foreign reserves, reducing the country to bankruptcy. The country is already faced with a serious economic crisis and had to borrow from the IMF on the pledge of reducing the budget deficit to 8.5% of GDP. It is these borrowings and other commercial borrowings that have helped us to continue importing and we still import food like rice, flour and sugar.

The government is putting the livelihood of the people at risk. Win the election at any cost, never mind if the economy is destroyed in the process. Lee Kuan Yew realized the danger of such policies in a democracy where the people are too stupid to understand the economic realities. He suggested that provision should be made in the Singapore constitution that the government should be responsible to maintain the foreign reserves at the level it inherited when taking office and that the president, the Head of State, should dismiss a government that allows the foreign reserves to fall.

The importance of independence for the Central Bank is clearly a necessity with such irresponsible politicians. One of the first things that the present Labour Government did when it assumed office was to grant complete independence to the Bank of England in the determination and execution of monetary policy, with the right of the Bank to ignore the views of the Chancellor of the Exchequer if necessary in its judgment. The Bank was required to disclose to the public the minutes of meetings of the policy making body - the equivalent of our Monetary Board. The public would then learn the economic rationale behind the decisions of the Monetary Board, why the interest rate is raised or reduced, why monetary situation should be tight or loose etc.

The public will also get to know of any differences of opinion between the Bank and the Treasury. The recent giveaways will increase the budget deficit, increase the rate of inflation, exhaust the foreign reserves and hasten the economic debacle, which this same government sought to mitigate and stave off by borrowing from the IMF only the other day. Economic retrogression will be accelerated and cause increasing poverty. Printing money cannot create prosperity and the public must learn this lesson. The government cannot create resources out of nothing. Just as the laws of physics preclude the perpetual motion machine, so the laws of economics preclude a free lunch.

So those who argue for expanding the role of the government and urge the government to increase its expenditure by taxation or inflation (forced savings) are asking the government to divert resources from alternative use. There could result in a multitude of scenarios. Maybe the govt. taxes and spends, in which case Citizen Perera buys less rice and flour and when the govt. spends it on the universities there may be more activity in the universities but less in other sectors. Maybe Citizen Perera withdraws from his savings account and then there is less to be lent to business.

Consumption will go down or investment goes down affecting demand for goods consumed or used in investment. Any rupee the govt. gets by taxation or inflation will reduce expenditure somewhere else in the economy. Widespread economic illiteracy prevails even among the professional and business classes. It is true that government spending can stimulate aggregate output and employment.

Irresponsible decision-making

The simplest models that economists would subscribe to go like this: The govt. spends wastefully on temporary projects creating short term economic hardship, which people attempt to overcome by borrowing. This bids up interest rates, which makes it less desirable to hold money (because money is not an interest bearing asset.), so people attempt to divest themselves of money by purchasing durable goods. This in turn drives up prices, which induces producers to expand their output, provided here is surplus capacity to produce, which leads to an increase in employment.

As it stands this story is incomplete and not quite applicable to a developing country. For example, rising prices need not call forth more output if wages rise in lockstep or there is no spare capacity to increase production. There has to be also some subsidiary story about why wages fail to rise when prices do.

So if the type of irresponsible decision-making with a view to winning the election is allowed by civil society without challenge, democracy will be shown as not conducive to economic development and no one will moan its demise. Since 1956 the ruling politicians have practised a type of politics which involved the spending of money without taxing. The money was borrowed firstly from the savings of the people and when these were not adequate, from the Central Bank - the modern equivalent of debasing the currency practiced by the European rulers like Henry VIII and Catherine the Great of Russia.

In the beginning the plantations could be taxed and they were taxed till they bled. The money so gathered was spent on free education, free rice, free health and subsidies on various food articles. Such taxing only led to the running down of the productive plantation sector while the spending of the money from the taxes was consumed with never a thought for tomorrow. Soon there was nothing to show by way of economic growth or the creation of employment opportunities for those who were being educated free for non-existent jobs.

Free education, which sought to make everybody to belong to the middle class, ended up by creating mass youth unemployment. Economists identify economic growth as the result of the maximum utilization of Labour, while increasing its productivity by deploying more capital for the Labour to work with using modern technology. So unemployment is a negation of economic growth.

Inflationary finance

When the money that could be raised from taxation ran out and the savings of the public dried up, the governments resorted to the printing press creating more and more new money to finance the growing public expenditure. The politicians have made the economy uncompetitive with the economies of the rest of the world since the differential inflation rates were much higher than in those countries. So our agriculture can’t be exposed to the global economy without crippling it and pauperizing the farmers. Nor can we take advantage of the global economy by producing manufactured goods for the world market utilizing our Labour which is still comparatively cheap at least in respect of the rates of pay in the developed countries.

Only some industrializing can absorb our surplus Labour. But our industrial products cannot compete with the products of other developing countries like China. So we had to give various tax and other concessions referred to collectively as BOI concessions to attract any foreign capital into industry. Our Labour is not cheap or productive when compared to that of other developing countries. It is our inflationary economic policies and the extraordinary Labour protection laws that have led to this situation, all the result of misguided economics and do good welfare policies, which the country could not afford.

Even if the BOI concessions alleviated the tax burden of the export industrial enterprises, these enterprises still have to cope with the high cost of Labour and the militancy of our trade unions, the result of over-protection extended by the Labour laws to workers and their trade unions. So their efforts to increase Labour productivity have been stymied by the militant trade unions, which have now entered the corridors of political power through the JVP alliance with the PA. The prolonged deficit financing financed by borrowing and printing money have left the economy with an unbearable burden. The PA by its excessive funding of the war without corresponding taxation has brought the economy to the brink of disaster.

The political alternative

Many professionals and businessmen naively believe that a UNP government could work wonders with the economy. But the adverse effects of wrong policies cannot be corrected so easily. Nor can the importance of good governance for economic development be under-estimated. The UNP runs the Colombo Municipality with as much corruption and inefficiency as the PA the Central Government. Rewarding ethnic minorities who are corrupt or incompetent merely because they constitute a vote bank cannot bring about good governance. Good governance requires men who are not only honest but also competent, who can take a decision on merit rather than be biased in favour of one’s clan or religion.

The public good or the common good should be the standard to judge the behaviour of any politician and those who seek to pursue the interests only of their race or community should have no place. But it is for the majority community to show that it is not communal, pursuing only the interests of the Sinhala majority but of the whole people and what the whole people need is efficient and honest administration irrespective of who is in the driving seat to execute such administration.

Will we ever achieve it in our plural society? The UNP in the past has misgoverned the country. Micro management does not concern the World Bank or the IMF. These institutions confine their attention to macro-economics. So they don’t bother when politicians use their power to exercise patronage, appointing party supporters instead of selecting persons to jobs on merit. Nor are they concerned when politicians wreck public enterprises by over-staffing them or misuse their resources to carry out their election campaigns. Nor do they object when they appropriate funds of the government for their personal or party use.

It’s only civil society that can and must take action against the politicians who cheat or rob public funds. But the people do not understand what is involved in economic micro management of government agencies. They do not mind such abuse as long as they benefit personally. So political patronage in appointments, transfers, discipline of public servants was resorted to by the UNP. Thousands of unqualified teachers were appointed. The education imparted in schools is only as good as the teachers. If unqualified or poorly qualified teachers are appointed what good is the education they impart? How can teachers be motivated if they are transferred at the bidding of politicians? What disorganization is created in schools by transfers of teachers? Each attempt to help one teacher will necessarily involve another and in this way lead to a mass of transfers disorganizing hundreds of schools.

A clear manifesto

Of course the UNP resorted to these practices during its last tenure of office under a different captain. The present UNP leader must tell the people whether he will stop such practices and appoint persons only on merit. He must pledge to effect the necessary reforms in education, in the public service, in the public enterprises, in the agricultural sector, in the financial sector and so on. It has never had the courage to reform the labour markets or remove the wage and price distortions which cause maldevelopment. It must explain the necessity of these reforms to the people.

Nor has the UNP given leadership to the people on how to resolve the ethnic issue and bring about peace. The voters and civil society groups must demand that the two main political parties should disclose their stand on the ethnic issue and the question of war and peace. What concessions to the Tamil minority do they propose to give to resolve the issue? The people cannot be fooled all the time and the future depends on correct political leadership. The unitary state cannot be maintained and some form of federalism is necessary. The people must be told the truth about a possible solution. It is too late in the day for bluff and camouflage.