The issue that will eclipse everything else including the war, this year and the next, will be the economic situation. The government has almost passed the first litmus test of the war, and now the question is whether they will pass the second litmus test of the economy. The impression among certain circles in Colombo is that the Rajapakse regime may have done well on the war front but that they will fail on the economic front. The latter expectation is in fact is one of the main driving forces behind Ranil Wickremesinghe’s determined bid to hang on to the UNP leadership at all costs – he feels that his time has not yet come. Those like parliamentarian Vajira Abeywardene feel that it is only a matter of time now, and that a few months hence, Wickremesinghe will acquire value in the eyes of the people as the only person who can deliver the country from the coming economic crisis.

Professor G.L.Peiris was the first government minister to speak out against the view that we need one party to fight the war and another to put right the economy. As the territory held by the LTTE continues to shrink and the end nears for the terrorist organization that held sway over Sri Lanka for so long, the focus will shift to the economy and on this front, the UNP still holds the propaganda advantage. There is a commonly held belief even among those who should by now know better, that the UNP is better at economic management than the SLFP, and that when the crisis hits home the only salvation for the people of Sri Lanka will be the UNP.

Cockeyed experiments

That the UNP had an advantage over the SLFP in terms of economic management was certainly true until 2001, when the UNP formed its last government. The economic history of this country from 1956 to 1977 is one of hare-brained economic experiments begun by SLFP led governments and the deleterious consequences thereof. When the SLFP came back into power in 1994, they had shed their ideological baggage of the past, and had reformed, with a vastly reduced propensity to engage in socialistic economic experiments. But true to form, the Chandrika Kumaratunga regime, despite their new commitment to pragmatic economic policies based on the free market, ended up being an economic disaster especially during its first seven years, just like all other SLFP led governments in the past. What was most remarkable was, that even though nothing new was introduced, production in almost all sectors of the economy increased during the Kumaratunga regime and production did not suffer unlike during the government led by Mrs Sirima Bandaranaiake in 1970-77.

Yet the CBK regime was an economic disaster from the very beginning with the country slipping into a politically induced economic slowdown as soon as she assumed power. By the time her regime came to an end in December 2001, it was possible to run a newspaper entirely on the revenue from advertisements announcing parate executions or bank foreclosures on properties mortgaged.

The UNP regime of December 2001 came into power with much promise of a new future. But the people of this country were left quite nonplussed with its economic performance. Usually people start spending money the moment they see the UNP coming back to power. And as could be expected, the people did start pushing up the stock market and land prices the moment the UNP came into power. But this bull run lasted less than a week. Thereafter there were occasional price increases in fits and starts, but generally speaking, stock prices and land prices remained almost at the same level as during the CBK regime for much of the UNP’s two and a half years in power. In fact the joke those days was that people did not know whether it was the second year of the UNP’s rule or the ninth year of Chandrika Kumaratunga’s rule. Stock and land prices began to increase only during the last six months of the UNP regime and that too was not due to economic reasons but due to promises of political handouts for the peace process.

The UNP’s idea of economic recovery was based far too much on passivity. Their way of restoring government finances was to cut down on government spending. In so doing they not only shed unnecessary expenditure, but necessary expenditure as well. They sought to reduce the budget deficit by stopping all recruitment to the government service except in some areas such as health and education. It’s not that Sri Lanka does not have a huge revenue base. It’s just that whatever is collected as taxes by government agencies such as the Customs and Inland Revenue Departments is not sufficient to meet the necessary expenditure. Technically it is possible to cut the coat according to the cloth available and this is what the UNP government of 2001-2004 did. Expenditure was cut down by halting recruitment and even essential infrastructure work.

Wild-eyed people

So the budget deficits went down, with expenditure down, inflation naturally came down. The budget deficits and therefore national debt was reduced further by privatizing state- owned assets and using the proceeds to cover such deficit. With these policies, the figures looked good, with inflation down and the national debt reduced. But the situation among the people belied the numbers which looked good. But the people were wild eyed with desperation and it was hardly surprising that that government was booted out of power in just two and a half years – an all time record for unpopularity in Sri Lanka. To cut expenditure by spending only what one gets in terms of revenue is not a difficult thing to do. The problem is that when revenue is not sufficient to meet what is needed, what does one do?

It is to address such a problem that leaders are needed. Technically, any country on the globe can put their financial affairs in order simply by refusing spend more than what flows into its coffers. If the leader is insensitive enough, there will be no such thing as a bankrupt country. The only reason why a nation would need to spend more than it gets in terms of revenue is if a section of the population requires more than it can provide given its revenue. It is people who require money to be spent and not inanimate objects. If a government is willing to ignore the suffering of that section of the population which is most in need of extra government expenditure, then this balancing of budgets and fiscal discipline is quite a simple affair.

But the reason why most countries run into debt or beg for aid from other countries is because a section of the population requires it. But the UNP of 2001-2004 forgot that the budget is for man and not the other way around. Consequently, what we had was a government uniquely indifferent to the distress of those affected by cuts in government spending. If all governments in the world can be as indifferent as the UNP was to public distress, then no government will be insolvent. When young people came to the UNP asking for employment, the insensitive reply was that there simply was no employment. If the unemployment problem could be dealt with as simply as that, then there would be no need for political leaders. A bespectacled government peon could do the job.

It’s the same when it comes to writing off the national debt by selling off assets. Anybody can do that too as living off one’s capital is one of the easiest ways out. The 2001-2004 UNP government’s economic policy was far too passive. All the so called economic victories of the UNP between 2001-2004, was not due to ingenuity, but to insensitivity. If we took the UNP’s ‘economic’ policy just a little further, we could have introduced innovative solutions like distributing cyanide capsules to all the unemployed so that they would bite it and cease to be a problem to themselves and the world!

While the UNP’s economic policy was based for the most part in an ingrained Marie Antoinette style insensitivity to the distress of the general public, it was also a very passive marking-time kind of policy with nothing proactive done. There were no major infrastructure projects started and the UNP’s two and a half years in power was as barren as Chandrika Kumaratunga’s seven years in office. The economic policy of the UNP was in accord with its overall political outlook. It sought to solve its economic problems the same way it tried to handle its other problems. On the political front the UNP’s policy was characterized by passively waiting for foreign powers to help control the LTTE partly by giving into their demands locally, while pressure was brought upon them from overseas to come to a compromise. On the economic front as well, it was no different. While on the one hand they insensitively cut down on expenditure, they tended to passively wait for aid to flow in from the west.

The easy way out

Even the manner in which they moved to obtain aid from the west was different to the UNP’s usual modus operandi. During the time of J.R.Jayewardene, the UNP obtained foreign aid entirely on economic grounds. But during the UNP government of 2001-2004, they tried to obtain aid on political grounds by marketing the peace process. So this expectation that outside third parties were going to wipe our bottoms for us was evident in both the UNP’s political as well as economic strategy. On the political front they expected the international community to save Sri Lanka the trouble of having to fight terrorism by forming an ‘international safety net’ whereby the western nations would use their influence over the LTTE to stop them from waging war against the Sri Lankan government; and they expected this same international community to provide the financial wherewithal to bail Sri Lanka out of the economic mess it had got into as well. Under the UNP, Sri Lanka could do nothing on its own without the help of the international community.

Today when the western economies are unable to fend for themselves much less for others, the UNP’s passive policies would prove to be disastrous for Sri Lanka. In the present economic crisis, Sri Lanka will have to bat for herself and it needs a government that has self reliance as the centerpiece of its policy. A can-do attitude is also most important. The UNP had and still has an attitudinal problem of always wanting to take the easy way out. The 2001-2004 government was by far the laziest government on record. Their dependence on foreign countries to solve all our problems for us is symptomatic of this slothful attitude. The present crisis needs a leadership that has the self confidence to rely on itself and is energetic enough to haul itself out of this crisis.

The present world recession is always compared to the great depression of the 1930s and the commonly accepted view is that it is the worst economic crisis to afflict the world since. It is no secret that President Obama, who like Franklin Delano Roosevelt in 1932, inherited a worldwide depression as he assumed office, is looking back to Roosevelt for inspiration in handling the present crisis. In America and the west in the 1930s as now, unemployment was increasing and credit was scarce, industrial and agricultural production was down and there was distress all around. In Sri Lanka too the effects crated by the global economic crisis is rather similar. Job losses are mounting, credit hard to find and industrial production is down. The only difference from the 1930s is probably in the severity of these signs of distress and the fact that agricultural production has been increasing in this country.

The method adopted by Roosevelt’s new deal to increase farm incomes was to create artificial shortages so that the price of agricultural produce increased. Farmers were paid to keep part of their lands out of production, and surplus produce was destroyed including the slaughter and discarding of millions of pigs and the deliberate ploughing of cultivated cotton fields in order to drive up prices. The strategy worked and the price of agricultural produce increased. In the industrial sphere, the formation of cartels by industrialists was encouraged to stabilize prices on the proviso that wages had to increase with the rising prices of goods. In order to improve wages, trade unionism was also encouraged and it was during the depression that a minimum wage and the maximum number of work hours per week were established.

Humane economics

The 1930s was an era when the ideology of balanced budgets held sway; but Roosevelt ran deficits in spending on social security measures such as retirement pensions, unemployment insurance, relief for poor families and the handicapped. Thus, Roosevelt’s new deal was an amalgam of contradictory policies and there was no ideological consistency in what he did. He was dealing with a full blown deflation, and hence he needed to stabilize agricultural and industrial prices and he encouraged price cartels among capitalists. Then he needed to look after those less fortunate so he introduced old age pensions, unemployment relief and pensions for the handicapped. Money going into the hands of the indigent helped increase demand for goods and services and aided in the recovery. Since the economy was for man and not the other way around, Roosevelt also ensured that the worker was not exploited, that he was given a decent wage and worked only reasonable hours.

The new deal epitomized a remarkable slew of reforms unlike anything seen before or since in any country. Roosevelt was great humanitarian who could take a holistic approach to things and it is no wonder that he was one of the most popular American presidents ever, winning four consecutive terms and becoming the cause for the later law which allowed only two terms. If we look at the situation in Sri Lanka, things are nowhere near as bad as the great depression of the 1930s. Even in the worst affected western countries, things are nowhere near as bad as then. In the 1930s, what was experienced in the USA and the west was a full blown deflation - probably the most unpleasant economic situation a country can be afflicted with. It was a situation where everything went down - prices, wages and the number of employed. If left unchecked, the population would have also begun to go down in a Malthusian way.

The present worldwide crisis burst upon the scene as crises in the financial system with banks, financial institutions and insurance companies going bust in the west. At the original stages there was some hope among economists in Sri Lanka that the problem here would remain limited to the financial sector. When The Island interviewed UNP politician and economist, Dr Karunansena Kodituwakku, last year, in the early stages of this crisis, he expressed the hope that it may perhaps not spread into the production sector as it did in the 1930s. But now that has begun happening with the closing down of factories all over the world. Western economies have also begun contracting and we are just short of a full blown deflation as in the 1930s. What probably has saved us from slipping into a 1930s style depression has been the cooperation among world leaders and international institutions to head off the crisis.

Be that as it may, the unfolding crisis will have the inevitable impact on Sri Lanka over the coming year and beyond. Remittances coming from overseas will drop as employment opportunities dry up in the West and the Middle East. Garment factories have already cut down on production and workers have begun losing their jobs. The silver lining for Sri Lanka is that spending on infrastructure projects will continue and the agricultural sector is doing well. Tea can be considered a relatively stable and largely depression proof crop as it is the poor man’s beverage reputed to be the cheapest next to water! Yet we are faced with an unprecedented crisis.

All this while, those to blame for deteriorating economic conditions in Sri Lanka have been our politicians. From 1956 onwards economic downturns in this country have been largely locally made, except perhaps in the mid-1970s when there was a worldwide food and fuel crises. But there too, the hare brained economic experiments of the Sirima Bandaranaike government exacerbated and magnified the impact of those crises in this country.

Wickremesinghe or Rajapakse?

This is probably the first time since the great depression of the 1930s that Sri Lanka is experiencing an economic downturn due to external events. Surviving this is going to take some deft footwork by those who wield power. To handle a crisis like this, you need a man who is a human being first and an economic manager second – and certainly not some free market automaton. Even though there is this belief that the SLFP is no good at managing the economy and that the UNP is what is needed to bring the economy around, the present columnist begs to differ. Certainly in the past, there was more than a little truth in the belief that it was the UNP that could deliver on the economic front and not the SLFP. But that situation changed after 2001 when the last UNP government was elected to power.

The economic policy of that ill-fated UNP government can only be described as a Marie Antoinette’s philosophy when she told those demanding bread to have cake! This is celebrated as the acme of insensitivity of rulers to the sufferings of the people. Firstly, there is controversy among historians whether Marie Antoinette actually said the words ascribed to her and secondly, even if she did, it would have been sensible advice because what she would have meant as ‘cake’ is not the fancy iced cakes that we know but compacted grain - whole meal cake. Be that as it may, we use the celebrated quote as convenient shorthand to describe a certain attitude especially in economic matters. The attitude of the UNP government of 2001-2004 to matters economic was somewhat similar.

In the opinion of the present columnist, to have a government with an attitude like that at this moment of time when there can be widespread distress throughout the country, would spell disaster that would end with riots on the streets. What is needed now is above all a man who feels for the people and is not indifferent to public distress. It was Che Guevara who said that before becoming a revolutionary, one had to become a human being first. The same applies inter alia to economic managers as well. He, to tackle today’s crisis, should like Roosevelt be able to relate to the people and to galvanize their support to meet the hard times ahead. He like Roosevelt should be able to look after the capitalist as well as the worker, the well to do as well as the indigent, to get through this crisis. He has to be a tough decision maker who does not sound like a cynic. Mahinda Rajapakse may hopefully fill this bill not because he is an economic genius, but because he has the right attitude and the attributes to see this country through the bad times ahead.