What is going wrong in the economic policy?March 19, 2017, 12:00 pm
By Laksiri Fernando
If we draw an overall balance sheet of the present government, the major deficit is in the economic ledger rather than in the political one. Although the promised political reforms have not yet been satisfactorily fulfilled, the people seems to feel much ease under the present dispensation than the previous one, according to reliable information. However, the situation might be quite chaotic on both fronts, if corrective measures are not taken in the foreseeable future. The past two years would be marked as not so productive,but abundantly ambivalent.
There seems to be a common defect or weakness underlying both spheres of economic and political policy making. In my opinion, that can be summarized as lethargy or lack of leadership. Then comes wishful thinking.
Take the example of the new constitution making process. So far, the government has failed to come up with a viable draft for a new constitution. It was admirable that the government allowed the Public Representation Committee (PRC) to gather people’s opinions from various parts of the country. It is also admirable that the Constitutional Assembly allowed six sub-committees to come up with their proposals. However, if the government had believed that a viable constitutional draft would emerge spontaneously out of these processes, that was a terrible mistake. That is not what we mean by democracy or even liberalism. A leadership is necessary, and that is why people elected a new government. The government had lost proper supervision or leadership in the sub-committee process. That is why we are in the present predicament.
When we look at the economic performance, the country has stagnated, if not gone backwards. This is not what people expected from the political change in 2015. The overall growth rate has come down than going up. It has adverse consequencesfor the people. After the end of the war, the GDP growth rate (2010-2014) rose to 6.5 which the World Bank called the ‘peace dividend.’ If it is just a spontaneous peace dividend, it should have gone up today, because now you have ‘better peace’ than before.
However, it has come down to around 5 percent during the last two years, the average per capita income still stagnating below US$ 4,000. At the beginning, it could have been argued that a temporary stagnation happened because some of the ‘corrupt or dubious’ projects of the past administration had to be stopped. But this is no longer an excuse. This does not mean that there have been no income or economic movement within the economy. Unfortunately, however, it has been to make the rich better off,while the poor eking out with difficulties to make their ends meet. This is particularly because of the increase of the value-added tax (VAT) to boost the government revenue disregarding many other alternatives. This was on the advice of the World Bank.
What Sri Lanka must do is what is good for Sri Lanka, and not for the World Bank. There is nothing wrong in strengthening the businesses in the country to produce goods and services, create employment and boost the growth. But it should not be at the expense of the poor, the working people, the needyor the average citizen.
There are major other setbacks in the economic performance when we consider the value of the rupee, foreign reserves, debt payments, sectoral unemployment rate, inflation of the essential goods etc.
What Happened to the Social Market?
There is nothing much wrong in the political policies of the present government. But economic policies have been lethargic and leaderless, and obviously not in the correct direction. At the beginning, they talk much about the social market economic policies. Even I was impressed about the pronouncements. However, this rhetoric has not been transformed into policies or practices. A social-market policy was particularly welcomed given the nature of the national unity government.
It is well known that the two parties in the government, the UNP and the SLFP have had somewhat different economic policies or approaches to the economy in the past. Therefore, to strike a balance between the two, a ‘social-market’ policy would have been ideally suited. However, instead of this balance, it appears that the economic policies have clearly tilted towards neo-liberalism dictated by the World Bank and the IMF. Yet, some people still argue that policies are not enough liberal or neo-liberal and that is the reason for the economic ‘drifting’ (Razeen Sally).
Ultra-neo-liberalism is revealed not only in internal policies but also in dealing with the international actors. On the controversial bond issue, it is clear that misappropriation has taken place, the government becoming quite ‘liberal’ on its bond policy. Instead of a balance policy of ‘direct placements’ and ‘primary auctions,’ that many countries follow, the government opted to go merely for primary auctions following some IMF guidelines. Even the IMF had not been so deterministic in their guidelines. Yes, primary auctions can stimulate the expansion of private bond market. But in this case, what has happened is a family benefitting exorbitant profits through insider-trading. Now the Minister of Finance has come forward in defending the deal.
There is nothing wrong in primary auction system, if it is balanced with direct placements as well. However, in primary auctions, conflict of interest or insider-trading should not be allowed in whatever the name. In a mixed economy like in Sri Lanka, the direct placements also should be allowed to certain public sector entities such as the EPF/ETF or public banks for their economic viability and ultimate benefit to the people. This can be open even to the insurance sector (public or private). That is what most countries do, not merely guided by neo-liberalism. The participation of the private business companies is important in an economy. However, the public sector also should be preserved and made even competitive with the private sector. That is how China has achieved its mammoth growth. We should not only turn West, but also should turn East for economic guidance.
This ‘neo-liberalism’ is also revealed in the so-called debt-equity swap deal for the Hambantota port. There is no denial that the former administration had taken loans to the brim. But just because those loans are difficult to pay back, the national assets should not be sold or leased for long periods (99 years!) even to the Chinese. China has revealed that the deal was something initiated or requested by the Sri Lankan government. As I have written in these columns previously, what should have been done is to have a joint venture formed with the same Chinese Company, the Ports Authority taking a 55 percent of equity. This is not a 100 percent swap of the debt, but at least 45 percent.
Debt is bad for a person or a family. But it might be a necessary evil for a developing country, if the loans are used strictly for developmental purposes and not for consumption or extravagant privileges of the politicians or bureaucrats. Although the IMF is strict on debt ratio (debt to GDP) for poor countries, countries like America or Japan are highly debt ridden countries. Only difference is that they have other means for raising loans other than the IMF. Poor countries like Sri Lanka are stuck with the IMF’s discriminatory loan conditions for foreign reserves and many transactions.
Some people want to blindly follow international norms and institutions whether they are on finance, trade or human rights. But considering clearly discriminatory effects on poor countries, we should ask them to be reformed. These include IMF, World Bank and UNHRC.
It is just wishful thinking on the part of the government or its main drivers of economic policy (the PM and the Finance Minister) to believe that free trade agreements would automatically bring FDI (foreign direct investment) and economic miracles to the country. They seem to be day-dreaming about free trade at a juncture where globalization is slowing down internationally. The only advocate of globalization today is China! The European countries only struggle to salvage the Union. The drive for free trade should be measured, balanced and realistic. One example of this contrary wishful thinking is PM’s interview to The Hindu newspaper on 15 December 2016. Answering a question about ETCA with India, the PM went about loose talk as follows.
"We want the Indian agreement also quickly. Because, one, the Indian agreement paves the way for a tripartite [arrangement for trade and investment] by 2017 — Sri Lanka, India, and Singapore. The agreements we have between us mean that we are at the crucial entry points of the Bay of Bengal and we can work further on a closer economic union within the Bay of Bengal [region]."
Here he not only talks about an agreement with India on which India and many professionals in Sri Lanka have reservations, but also talks about a tripartite agreement between India, Sri Lanka and Singapore. Not only that, he talks about a closer economic union within the Bay of Bengal region. Then he repeats the urgency of the Indian agreement as follows.
"For that to succeed also, we require the agreement with India, because the five southern States [Tamil Nadu, Karnataka, Andhra Pradesh, Telangana, and Kerala] and Sri Lanka — the total GDP of such an economy is over $500 billion with the possibility of doubling to a trillion dollars within a decade or so."
Now here he talks about a ‘new economic union,’ comprising the five southern Indian states and Sri Lanka, even completely disregarding the quite acrimonious political problems existing between Sri Lanka and Tamil Nadu. In addition, Sri Lanka is a $ 80 billion economy with 21 million population. By pooling this in a $ 420 billion South Indian region with a 300 million population would bring disaster to Sri Lanka, purely considering self-interest of the country.
At least those who propose these fancy ‘economic unions’ should first show proper research, feasibility studies and clear plans. These people also should learn from Brexit and current trends in the EU. At least the architects of the European Union took some decades to evolve their blue prints. But our pundits (sorry to say that) think everything would evolve as magic. The expressed thinking is to double the size of the economy or the per capita income in the region as stated. Why cannot Sri Lanka do it itself, without risking a disaster. Didn’t Sri Lanka manage to double the economy during the last decade (from $ 40 billion to $ 80 billion)? Increased trade or even political cooperation with South India may be desirable, but not definitely an economic union at this stage.
A Bizarre Professorial Analysis
This is almost the same proposition that recently Prof Razeen Sally has put forward. Going beyond the Prime Minister, Sally has also touched on some sensitive political, ethnic and religious matters. Among his "Sri Lanka: Three Scenario’s for the Future" (DailyFT, 17 March), the following is one of his formulas for the economic take-off in Sri Lanka.
"Multinational firms will establish South Asia hubs in Sri Lanka and link it to global supply chains in manufacturing and services. Sri Lanka will have much closer links with South India, its big business houses and its 300 million consumers. It will be South Asia’s hub and gateway for trade in the Indian Ocean."
It is very much similar to RW’s wishful thinking. What is most questionable among this Professor’s (Associate Professor of Public Policy at a Singapore university) prognosis of Sri Lanka’s economic ailments is the following.
"The Wet Zone’s natural bounty breeds a fatal complacency, especially in Sinhala-Buddhist culture. …A culture of working hard, planning for the future and earning one’s success has never taken root. It has among the minorities – hardy Tamils used to eking out a living in the barren north and east, Muslim traders, Colombo’s tiny Indian trading castes, even Christians – but not really among Sinhala Buddhists."
In my concerned opinion, what he explicitly expresses is a ‘racial prejudice.’We usually here racial prejudices coming from the majority community. Here comes a racial prejudice from the minority. Even if there is some element of truth in what he says about the Wet Zone, the way he talks about other ethnic and religious groups even living within the same Wet Zone, leads to conclude that he is utterly prejudiced.
Apart from the above prejudicial statements, the economic panacea of Sally is also similar to the views of our PM and those who at present run the economy. Apart from his academic position in Singapore, I understand that he is also the Chairman of Sri Lanka’s economic think-tank, the Institute of Policy Studies! I also wonder whether he is also an advisor to the PM or the Finance Minister?
Last Updated Apr 28 2017 | 09:24 pm