How far is the Govt responsible for the current economic malady ?

2018-10-02

Sri Lanka has a strange colonial experience of being provided with free education, health care and subsidized rice even while the country remained a colony of Britain. During the ensuing decades since independence, the country’s new leaders pushed the envelope further,much less due to a coherent long term vision, but as a populist electoral ploy. As a result, generations that grew up immediately after the independence developed a unique outlook on the role of the government as feeding and clothing them and their ever expanding legions of children. During the 60s, Sri Lanka also had a fertility rate that could rival the Sub Saharan Africa’s present record. However, commodity bonanza of the post-Second World War did not last longer and the plight was made worse by the mishandling of the economy.

Demographic bulge exploded in two generations of insurgencies in the South, and a good deal of the remainder were sent to the Middle East to toil for the Arabs.   
However, neither successive governments, nor people did grasp the full extent of the country’s economic maladies. The root cause was all too visible, but addressing the problem was politically uncomfortable. Successive governments opted to short term remedies that could postpone the full impact of the economic meltdown, and passed it to its successor.   

Now we are back to square one as the Rupee has plummeted to its all-time low against the dollar. However, the impact is felt more than before for the government for the first time has chosen not to seek recourse in usual short term and inevitably futile measures to prop up the falling rupee. In 2011, then Mahinda Rajapaksa regime burnt US $ 4.2 billion of foreign reserves to defend the rupee. When dollar reserves ran out, the Rupee depreciated by 13% within a year. This government, which has previously justified the lease of Hambantota port on the debt service cost of the port loan and the injection of US $ 1.2 billion by the China Port Merchant, reportedly spent US $ 1.2 billion to defend the rupee in 2015. Notwithstanding the Central Bank intervention, the rupee depreciated by 9% in that year. The current government’s decision not to repeat the usual folly is much less due to its economic acumen, than due to the absence of dollar reserves. With about US $ 6 billion of debt service payments scheduled for the next year, the government is left with less than US $ 1.5 billion of foreign reserves.   

In that sense, the government’s resolve to opt to the unpalatable choice and to let the market decide the value of the rupee is salutary. The other option would still have the same outcome as per the rupee, only after the Central Bank exhausts several billions of dollars, and potentially creates conditions for a loan default. Also, the foreign exchange crisis is not uniquely Sri Lankan. Nor are its immediate causes domestic. From already crisis-ridden Latin American economies to otherwise sound Indian and Chinese economies, native currencies have depreciated against a stronger Dollar.  

However, three years is long enough time for the government to address the root causes of its balance of payment problem. That root cause is the lack of exports that brings in dollars. The government’s policymakers have kept repeating the virtues of an export- oriented economy. They are right in their economic conviction. But, there is a major difference between aspiring for things, and strategizing and implementing means to achieve those ends. In that sense, this government has seminally failed to implement its economic vision, only if it has one.   

There are two ways to interpret that failure. One is at the extreme end of liberal market economics, this government should be thinking that everything will be determined by the market forces. So that as the rupee depreciates further, exports become completive and hence, the export income increases. At the same time, imports become expensive, and curtailed by low local demand, hence the trade deficit gets plugged in. However, as the recent history of political economy would attest the economic theory has not taken a life of its own, much less so in the developing world, without calculated government interventions.  

Economic liberalism itself causes a good deal of physical and psychological displacement , social upheaval and short term pain

The second conjecture is that irrespective of what it thinks and what it wants to achieve, this government is ineffective, bereft of cohesion, and increasingly so, political capital. That turns the government into a mere passenger of the vehicle it was meant to steer. My guess is that the second is a better reflection of the government policy.  

Consider the following. While clamouring for an export- driven economy, this government undermined even the already secured foreign direct investment, be it the Colombo Port City or the proposed infrastructure development projects. Suspension of these projects was reflected in the lower economic growth numbers of the previous years. Policy uncertainty of the government has further discouraged investment since then.  

Second, it lacks the political capital and decisiveness to implement crucial economic policy reforms and development projects. Even though the government may enter into several Free Trade Agreements, we are still left with nothing to export. Its proposed economic zones, probably the most transformative one being in Hambantota, are trapped in a policy vacuum. You need a government with political will and assertiveness to acquire land and reform labour laws. Vacillating in these measures has only contributed to the current fiscal woes of the government.  

Third, despite its self- professed commitment to free market, which by extension should favour competency over nepotism, this government has acted not differently from its predecessors. Managing loss- making state- owned- enterprises, Srilankan Airlines being one of the biggest drain of public coffers, would have been done better under a nonpolitical board of directors, hired through an international recruitment process. Instead, the government has stuck to its cronies.  

So, effectively three years has been squandered, and it is unlikely that nothing much would happen in the remainder of the current term of the government.  
And fourth, there is another, unpalatable reality of the conditions that underpinned the success of economic liberalism, especially in the developing world:Economic liberalism is best served with political authoritarianism. That is the stubborn reality from Augusto Pinochet’s Chile to development dictatorships of East Asia, Malaysia, Singapore, and the present day China.  

There is logic to it. Economic liberalism itself causes a good deal of physical and psychological displacement , social upheaval and short term pain. Only a government that can ignore short term public grievances, and cohesive and single minded enough to forge ahead with its policy can prevail over a plethora of vested, and often competing social impulses. However, means and mode of political authoritarianism have also moderated over time, from Chiang Kai-shek’s white terror to a more subtle power centralized approaches of Dr. Mahathir Mohamed and Lee Kuan Yew.

The bottom line however, is in the developing world, the leaders have to choose between being a political liberal and an economic liberal. Trying to become both would lead to being neither.  

 This government’s desire to present itself as the one that restored democracy is in conflict with what is demanded from it to truly leapfrog the economy. For that, its apologists could even project the government’s spinelessness as virtuous. However, running a country is lot more than being sanctimonious. It entails dispassionate policy making and implementation. There however, this government is at fault for lacking it.   

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