The policies advocated to 'Regain Sri Lanka'

By Dr. H. N. S. Karunatilake
Everyone knows that the 222 page document entitled "Regaining Sri Lanka" is an alien product written by officials from the IMF and the World Bank although it has been said that it is the work of 19 groups that "carried out intensive reviews under the Ministry of Policy Development and Implementation chaired by the Honourable Prime Minister".

The major problem about this publication is that it has not been officially released by the UNP and very few have had access to it so far. The writer had to borrow a copy to do this write up from a good friend. The first question that has to be asked is why is the UNP secretive about it and why are all kinds of excuses being made not to make it available to the people, considering the fact that the publication was first released in December 2002 in advance of the Tokyo Aid Meeting? Even members of Parliament have received copies only in the last week of July 2003.

The first confession is that the document admits that Sri Lanka is facing an "economic crisis." The UNP has by December 2002 been in power for more than one year but has it taken any positive steps to deal with the crisis’ The Report then goes onto deal with the "Four Challenges Facing Sri Lanka". These have been identified as 1. Increasing Employment, 2. Overcoming the Public Debt Crisis 3. Resources for Reconstruction and 4. Increasing Income Levels.

It says out of a total workforce of 6.7 million 6.2 million are employed leaving 528,000 people who are unemployed. It has to be pointed out that in the figure of the employed are included 673,000 unpaid family workers who are mostly housewives who are compelled very often to stay at home as they cannot find employment. If this figure is included in the unemployed category the total unemployment would be 1.20 million or nearly 18 per cent.

The policy of this Government has been to create unemployment than employment. It has still not made a clear pronouncement of its stand on employment and employment generation. Many institutions have introduced voluntary retirement schemes to get rid of what they have called "excess workers". The rot was started by the Central Bank in 2001 and many private firms have followed suit and the most recent examples are Elephant House, the CWE, Building Materials Corporation, and there is a proposal to retire 100,000 employees in the public sector.

How can the UNP create new employment when government departments and organizations and firms in the private sector are scared of employees, especially those that belong to trade unions? Do you think that firms that have retrenched workers would take new employees? With regard to State Owned Enterprises the document goes onto state that "there is much overstaffing in these sectors". There is a major contradiction in the statement "A streamlined, more efficient public sector would release these workers to more productive employment in the private sector". By transferring workers who are in receipt of handsome voluntary retirement benefits to the private sector would that not hinder the creation of new jobs for those who are seeking employment for the first time? Where will the new additions to the workforce find employment?

It is said in the Report that a minimum of 2 million new jobs have to be created in the next several years, but a time frame has not been specified. There are reported to be 35,000 graduates who are looking for jobs while those who pass out annually with Advanced Level qualifications exceed l00,000. Every year therefore, there are about 150,000 persons who would be looking for employment for the first time and in 2002 and 2003 alone the unemployed who are looking for jobs would have increased by 300,000. Therefore in order to clear the backlog alone (1.2 million plus 300,000) or 1.5 million jobs will have to be created immediately to give relief to new workers and not in the "next few years".

There is hardly anything said about how the UNP is going to provide new employment opportunities.

There are only vague and unimpressive analyses of the sectors that have been identified as having new employment prospects. Furthermore, there is no quantification of the employment potential in each of these activities and sectors.

There are no references to employment generating projects in the Report except the statement that employment generation will be in the private sector and "a substantial amount of employment will come from self employed persons and small businesses".

So far unfortunately, most of the new employment has been created overseas, in other words we have been successful in exporting unemployment and this has undoubtedly been assisted by a depreciating exchange rate. There are well over one million Sri Lankan workers in the Middle East alone and they are paid the lowest wages among all expatriate workers.

For how long can the country depend on overseas employment and in any event most Asian countries do not send females for employment abroad. The Report does not deal with the overseas employment problem and does not indicate how it proposes to deal with the innumerable negative aspects of the problem. Since the bulk of the oversees employees are females no one talks about the human aspects and the social costs of employment overseas. The UNP should be aware that unless the Government embarks on major projects there will be few opportunities for the local private sector to participate.

The private sector does not have the capacity to undertaken projects that would cost over Rs. 500 million because loans of that magnitude cannot be handled by banks in this country. Most local firms have the capacity to only undertake subcontracts.

The two financial institutions that are concerned with development finance the DFCC and the NDB are now engaged in commercial banking and their endeavours have been to buy over other banks and financial institutions and not to fund infrastructure, agriculture and industry. Why is the DFCC Bank trying to buy the bankrupt the National Mercantile Bank (Merc Bank) at Rs 2.65 per share and what is the stand of the Government and the Central Bank on this issue? Has there been any political influence brought to bear on this transaction knowing its antecedents.

A considerable number of financial and other incentives have been given to the private sector so far with little or no impact. What we read in the newspapers everyday is that many industries and businesses are closing down every day.

It is reported that more than 49 companies have wound up their business enterprises in the last 18 months.

Most of them were BOI concerns and were owned by Sri Lankans, Koreans and Indonesians.

When the Government is trying to create new employment it is tragic that the closure of these companies alone have thrown more than 20,000 out of their jobs. Under the parate execution provision for debt recovery, daily there are about 20 notices in the newspapers published, even though some may not involve credits taken for industrial and business purposes.

Financial institutions and commercial banks exercise stringent controls over credit management because their prime concern is profits and not rational service to the business community. Many of them are engaged in massive publicity campaigns through which false hopes and expectations are given to the innocent people. None of them today are concerned about the revival of sick industries on account of the negative stance taken by them and the Central Bank and the Government. The stand taken by the Report on "Regaining Sri Lanka" is that unless you are efficient, competitive and export oriented a business concern need not survive. This message has been repeated in several places of the Report.

The next issue mentioned in the Report is the "Public Debt Crisis". It is stated that the per capita debt in 2001 was Rs 77,500, that debt service has exceeded the total revenue of the government and the government continues to incur large budget deficits to meet expenditure. If all this is relevant what is the impact of the $4.5 billion pledge at the Tokyo Aid meeting? Will it not further raise the per capita debt? According to the writer’s estimate the per capita debt has increased further in 2002 to Rs 87,842 in a matter of one year or By Rs 10,342, and what will be the outcome of the Tokyo pledges on the per capita debt and the debt service payments? In 2001 the Government debt as a percentage of GDP was 103.2 and in 2002 it had reached 105.9 per cent.

What has the government done to raise more revenue? As far as mobilizing more revenue the government has functioned on reverse gear by giving tax concessions and financial incentives to investors, especially under the BOI. Even dubious Chinese medical clinics and environmentally harmful projects have got tax concessions from the latter.

The government has said that VAT collections are expected to fall below the target of Rs 120 billion this year by Rs 20 billion. The most harmful concession has been the Tax Amnesty Act that has across the board given a tax amnesty to tax evaders in all categories, customs, income tax, exchange control and other taxes and the expected loss from this, has been estimated at least at Rs 70 billion.

The Finance Minister has said that there have been over 14000 declarations from habitual tax evaders and that more declarations are expected in the next few weeks. It is clear enough that the Amnesty will largely benefit those big businessmen who have given funds to the ruling party for political work.

Overall, has the government taken steps to raise adequate revenue and curtail expenditure in the context where defence expenditure is static and complaints pour in that military hardware has not been procured to maintain the readiness and efficiency of the air force and the army, and the public service has not been given a salary increase and there has been an embargo on new government recruitment.

On the government side there has been no effort made to contain expenditure.

The latest is the news item that the salaries of Parliamentarians are going to be increased despite the plethora of ministries, now numbering some 70 and unprecedented perks that Parliamentarians have enjoyed.

The government has not said whether any of the pledges made at the Tokyo Conference have arrived or when they are expected. It has been explicitly stated that the aid is conditional on the progress made in the peace endeavour. Efforts have been made by the government to show that the foreign aid is on highly concessional terms, but a factor that will offset the low interest rates for these international credits would be that these debts will have to be serviced in foreign exchange at progressively depreciating rupee exchange rates in the future. What these exchange rates would be in 10 or 20 years time no one can guess.

The object has also been to reduce the budget deficit and thereby to reverse the increase in the public debt. With the Tokyo pledges however there will be a shift in the composition of the public debt from local to foreign, with the latter component rising very fast. But can more revenue be mobilized? Already there is a major shortfall in revenue and the funds pledged at Tokyo cannot be used to finance budget deficits.

The government therefore cannot achieve a deficit of 7.5 or 8 per cent of GDP. Accordingly it may have to borrow from the banking system or in the market through bonds and Treasury bills. The above budget deficit figure is one of the key conditions of aid and further drawings on the $535 million PRGF will depend on it.

Finally all this will mean that the per capita debt will rise in an unprecedented manner and the government will continue to be caught in a debt trap far worse than what there is today.

The third focus is on Resources for Reconstruction and it is stated that it is necessary to "invest in major construction efforts in all regions to lay the foundations for substantially higher rates of economic growth".

The Report points out that "the country will need to generate much of the resources for these efforts itself. The country can begin to adequately meet these demands only if there is significantly higher growth in employment and incomes, increasing our tax base" How does this statement stand in the context of the ongoing retrenchment programs in all sectors of the economy and the tax amnesty? This confirms that only those who are employed and earn incomes could provide tax revenue. What is important therefore is to rapidly create new employment opportunities, and in the prevailing situation does the government have the capacity to create new employment? "Our goal is not only to substantially increase the numbers employed, but also to increase people’s incomes.

However, incomes can only grow in line with increases in productivity without productivity growth, any attempt to raise incomes will only lead to higher inflation" This of course is a standard prescription of the Bretton Wood Twins. But conversely some amount of so called unproductive employment initially may be necessary to stimulate demand for goods and services and the first round of inflation will increase price levels and promote production and investment and would activate the multiplier. In an economy with a high level of unemployment the Keynesian prescription of employment generation would not be out of place.

Thereafter the Report advocates a growth rate of 10 per cent. and refers to missed opportunities with the illustration "If more effective policies were pursued from 1970 and Sri Lanka was able to match Thailand’s average growth rate of 6.68 per cent, GDP in 2001 would have been 87.4% higher. That would have amounted to Rs 1683 billion or $1005 per person" and "If Sri Lanka had been able to match Singapore’s growth rate, GDP would have been Rs 2579 billion in 2001, or US$ 1541 per person, or 187.3 higher".

The comparison of Sri Lanka with Thailand and Singapore may not be relevant taking into account the form of government and the homogeneity of the population while Singapore has always been a one party small state, with no alternative administration. The Report tries to provide an answer to "How can Sri Lanka improve productivity?" The answers provided to this question have a typical orthodox economic bias and could only have been produced by the donor agencies. According to them the conditions that have hurt productivity in Sri Lanka are:

1. High electricity prices, a result of past mismanagement.

2. Regulations restricting the diversifiction of crops, limitations of land ownership and constraints on foreign participation.

3. In the agricultural sector, high import protection of some basic foodstuffs has fostered inefficient production and high prices.

4. Tax trade and regulatory policies have reduced investment levels and led to distortions in investment patterns and reduced economic growth. In sum what the foreign advisors want is complete private sector based free trade, competitiveness and Government non intervention. However the high price of electricity is a very relevant issue because the government due to the involvement of various pressure groups has not invested in coal power plants, currently the cheapest source of energy.

Limitations on land ownership is undoubtedly a major drawback for agriculture. But what is the significance of restrictions on crop diversification? The foreign advisors want the government to move away from paddy to other commercial crops and to relax protective duties.

There is no consideration given to food security, despite the fact that all countries including U.S.A. and Japan give considerable protection to the farmer. In regard to the fourth issue they advocate the total removal of trade and regulatory policies and the elimination of controls without any protection for local enterprise. This is in conflict with the policies for the creation of new employment because new enterprises can emerge and existing enterprises can survive only if protection is afforded. To create a million new jobs at least 10,000 new enterprises must come into existence.

There are several controversial statements in the text, "The government will accelerate the process of privatization" and "In many areas services provided by the government can be more efficiently provided by public private partnerships or private contractors".

These are the typical conditions that are laid down by foreign advisors and international credit institutions. According to them privatization is the panacea for all economic ills. The new Revenue Authority is a major proposal contained in this document and the government seems to be determined to go ahead with it, despite the opposition of Inland Revenue, Customs and Excise Departments. The danger with the proposal is that incompetent party stooges or defeated candidates will be appointed to the Authority.

While the government is interested in decentralizing the administration and is even willing to accommodate federalism, this is a step that will result in the centralization of power over the key financial departments, recruitment of incompetent employees and costly perks for the Directors of the Authority.

The proposals to create 2 million jobs are not only nebulous and unclear, but they have no pragmatic significance. There no reference to the activities and sectors where these jobs would emerge and the potential in the agricultural and industrial sectors has been totally ignored, while a great deal of attention has been focused on the tourist sector which is only one part of the large services sector.

One proposal to increase employment is to improve communication between employers and potential job seekers through information technology. The local newspapers are full of advertisements of job vacancies and how many of the very poor job seekers have access to IT facilities? It has been suggested that technical tertiary education must be expanded, but where are the job opportunities for the technically trained? There are hundreds of technically trained persons even in the IT field that have not been able to find jobs? Does it not make sense to prepare an overall employment plan so that there could be a matching of job opportunities and the technically trained persons.

Such micro planning will be quite alien to the pundits in the Fund and the Bank.

An entirely private sector oriented outward looking approach, without any compromise is evident everywhere in the Report and this is confirmed in "Reaching a 10 percent growth rate will depend on increasing exports and expanding access to overseas markets". It is implied that exports are a prerogative of the private sector and high growth rates can be achieved through export effort.

Later on in the Report it is stated that high growth rates may not necessarily increase welfare and reduce poverty. Export led growth has been one of the archaic and cardinal principles advocated by the Fund and the Bank, but there is no reference to the production of goods for the domestic market. The presumption is that if the 2 million jobs materialize with new incomes, most of the goods must be imported rather than be produced at home. Exports will mean that the there will be frequent depreciation of the rupee exchange rate to sustain the "competitiveness of exports" and the country will be spending the bulk of the foreign exchange earned on imports, thus increasing the volume of international trade, a prime objective of the Fund and Bank.

Overall, with regard to the proposals to "Regain Sri Lanka" the Report states "It offers a fundamentally new approach for the Sri Lankan economy - one that includes the elements for success in the world economy today. In order to meet the economic challenges that we face, the entire country must be fully engaged in the process of improving productivity and meeting the competitive demands of the world markets." In effect what does this mean? Improving productivity means that the value of a worker’s output has to be much higher than his wage and the easiest way of doing this is by using capital-intensive methods of production and minimizing the use of labour.

Competitive demands of the world market can be achieved by capital intensive methods of production and using much less labour and by depreciating the exchange rate, but that will in turn increase unemployment and production costs in the economy on account of the dependence on imported inputs. If these dictates are followed the Report must indicate how the conflict in policy can be resolved and how the 2 million new jobs are going to be created and in this regard there is no analysis in the Report This is indeed not a new approach but the standard prescriptions and anti national policies of the Fund and the Bank that have been debunked and thrown overboard by most developing countries.

In regard to the "macroeconomic policies" conflicting objectives need to be highlighted. "The principal immediate objective is to fulfil the Government’s commitment to maintain the budget deficit for 2003 at 7.5 per cent of GDP" and "implement a stable and efficient low tax regime" Already the Budget has gone haywire by a deficit in the expected revenue of Rs 20 billion.

How can the Government raise revenue by low taxation and is there not a conflict in policies? And further what is so sacrosanct about the commitment of the Government to stick to the 7.5 per cent budget deficit? The Government has also been urged to maintain a stable, low and uniform tariff rates, so that imports can flow in freely and destroy local production and to comprehensively reduce non-tariff barriers and also to "take necessary steps to extend and complete the reform of exchange controls, including the remaining capital controls that inhibit investment and the development of financial services." What all this implies is that the country has been asked to open the capital account and introduce a regime of free trade of unprecedented dimensions that is not found in Europe the United States and Japan.

There is no space here to highlight the large number of other deficiencies in the Report. But in brief the general conclusion that could be arrived at is that there is repetition of issues and facts all over in the Report.

The analysis is haphazard and disjointed. There is no central theme. It would appear that this is an effort to put together the 19 sub committee reports without any form of discretion and editing. Part 11 which consists of some 137 pages is nebulous and repetitive and deals with a profile of the poor, reducing conflict related poverty, creating opportunities for pro poor growth, investing in people, pro poor governance and empowerment and implementing the poverty reduction strategy.

The bulk of the Report is on the poverty situation in Sri Lanka. But other than an analysis of poverty hardly any positive and pragmatic proposals have been made to overcome the poverty problem, even though the Report admits that growth alone is an insufficient condition to eliminate poverty.