In a recent (revised) article "Trickle Down Economics – My Foot!" (The Sunday Island 10th October 2004) Kaywatta offers a lengthy and enthusiastic defence of extensive government intervention in the economy. This was in response to my earlier article (The Sunday Island, 26th September 2004) where I sought to distinguish between some of the rhetoric and the reality in an ongoing debate that will help to determine the economic future of the country. Given the importance of these public policy issues it is worth briefly addressing some of the points raised.

Kaywatta’s article raises a number of points that rightly deserve a longer and more detailed discussion than can be done adequately here. Some of these might be better addressed in separate future articles. This response seeks only to clarify several areas where there seem to have been misinterpretations or factual discrepancies.

1. Kaywatta argues that China and India are examples of countries not pursuing free market economic policies, arguing more than once that China is "still a state controlled economy". Acknowledging of course that all countries maintain some degree of government intervention, it is worth keeping in mind the following four points:

2. Kaywatta argues that markets alone cannot "guarantee optimal welfare". He is of course correct. No system is perfect. The issue is not whether markets are perfect, but rather whether they are substantially better than the alternative – some form of central control of the economy. The answer is, of course, yes. One would have thought that there is overwhelming and unambiguous evidence over the last fifty years, including here in Sri Lanka, to leave little doubt on this point.

3. There are indeed areas where markets have limitations, especially, as he notes, when it comes to controlling environmental pollution. This is most often because people treat air and water resources as free goods. But the most effective answer to these problems is usually to strengthen, not weaken, the market mechanism where these problems exist. Increasingly the world is turning to the introduction of tradable pollution rights as the most effective approach for dealing with many environmental pollution problems, such as is embodied in the Kyoto Accord.

4. Kaywatta argues that market forces "create inequality and marginalize the poor". This is a point that is repeated in various ways throughout his article, particularly the problems of the rural poor. In fact many of impediments to actually alleviating poverty are the result of excessive misguided state interventions which limit the abilities of markets in the rural economy to function properly. For example, farmers particularly suffer from excessive government controls that have resulted in the lack of clear titles to their land, regulations on what crops they can grow, how they can market their produce and inefficient subsidies for urea, but not other types of fertilizer. One might add to this list the UPFA government’s current attempts to import large amounts of duty free rice to manipulate domestic prices.

5. Kaywatta also suggests that "there are macroeconomic imbalances such as balance of payments deficits, inflation, and currency changes in value, which can only be addressed by state intervention." In reality these are almost always the result of misguided state intervention, often seeking to manipulate the economy for political ends. One need only look at the results of the mismanaged intervention during the last six months by the UPFA government and what this has done to the cost of living, the value of the rupee and the expanding public debt.

6. Kaywatta misleadingly points to increasing numbers of unemployed as evidence of the adverse impact of free market policies. ("The number of unemployed rose from 537,000 in 2001 to 626,000 in 2002 and 648,000 in 2003.") The same Central Bank Annual Report table shows that between 2001 and 2003 there was an increase of more than 700,000 additional people employed. The Central Bank also points out that two reasons for the increase in numbers reported as unemployment were the inclusion of the Eastern Province in the data beginning in 2003 and the fact that people evidently showed a "greater willingness to engage in economic activity following positive expectations of economic recovery since 2001."

Finally, Kaywatta concludes his article with a quotation from the Human Development Report of 1996, repeated here.

"Economic growth should lead to fuller choices for all people - rather than few choices for most people or many choices for a few. But it is never enough to wait for economic growth automatically to trickle down to the poor. Instead, human development and poverty reduction must be moved to the top of the agenda for political and economic policy making and even when links between economic growth and human development have been painstakingly established, they must be protected against being blown apart by sudden shifts in political power or market forces."

We can both agree with the sentiments expressed in this quotation. However, the central question is how can these goals best be achieved? As argued in my original article, the caricature of so-called ‘trickle down’ economics is not an accurate picture of how market reforms work to generate economic growth and benefit the poor. Certainly since the 1996 Human Development Report was published there has been considerable experience and research produced to demonstrate the positive, critical impact of economic growth on alleviating poverty.