The Government’s delay in punishing members of the previous government guilty of fraud and other crimes while embroiling itself in a massive bond scam contributed to eroding voters’ faith in the administration’s ability to bring about meaningful change - AFP
Monday, 26 February 2018
The purpose of this article is to discuss the causes of the massive failure of the Government at the local government elections held on 10 February 2018 and their impact on the economy.
Protectionist policies
The country took a step forward when the current Government was elected in 2015 and 2016. The economic policies announced and developed by it were a sharp departure from the protectionist policies adopted during the preceding 10 years; import tariffs or duties were increased to very high levels and numerous para tariffs such as cesses and exemptions were imposed indiscriminately [all products, percentage share of tariff lines with international peaks, Sri Lanka (SL) 41.18, Malaysia 13.03, Singapore 0.0, India 6.56, World Bank 2013-2015]. These high tariff walls gave protection from imports from the rest of the world, that were usually priced low, to firms supplying goods and services to the domestic market. Such barriers enabled these firms to sell their goods and services at higher than world market prices to the local consumers, who suffered consequently, while the firms that were protected in this manner made high profits generally.
Social Market Economic Policies
A small country like Sri Lanka cannot afford to adopt such a ’frog in the well’ policy for four main reasons:
a) The firms supplying only to the small domestic market cannot produce goods and services at low prices as they do not enjoy ‘economies of scale ‘ or at low unit cost, as their costs are not spread over a large area of production
b) The quality of their products also may not match the quality prevailing in the world market as there could be no competition for them both from local and global firms; it is competition which generates pressure for firms to innovate to increase production and quality, even to differentiate it to avoid competition, while lowering unit prices
c) Thus the protected firms may not be able to sell in the world market or export to earn the badly needed foreign exchange for the country to pay up its massive foreign debt ($ 46 billion in 2016)
d) Nor generate sufficient well-paid jobs especially for the youth of the country – what is necessary is to increase scales of production for creating job opportunities and for supplying to the world.
The South East and East Asian countries, especially the so-called ‘little tigres’ namely South Korea, Hong Kong, Taiwan and Singapore, have adopted such open economic policies and prospered enormously while the closed (by high tariffs) economy of SL has stagnated.
The type of economic policies adopted by them and the most successful economies in the world can be described as Social Market Economic Policies, the definition of which is: “Economic systems in which industry and commerce are run by private enterprise within limits set by the government to ensure equality of opportunity and social and environmental responsibility.” (Free Dictionary). Most of these South East and East Asian economies also benefited from large inflows of foreign direct investments (FDI) which brought in modern manufacturing technologies and global market access for their products and services, as they provided a positive enabling environment for such investment; SL has failed to provide such a climate for FDI.
Fortunately the present Government too adopted these liberal policies. It has prepared a fairly comprehensive Sri Lanka Vision 20-25 document containing these policies and is in the process of preparing a National Export Strategy paper mainly to reduce the mess of red tape involving the import and export trade to provide relief to exporters.
The Government has taken more than two and a half years to prepare these policies and the implementation of these has not yet begun. Nevertheless, they are the right policies for Sri Lanka to achieve prosperity and create sufficient job opportunities for the unemployed.
At present no other party has announced the adoption of such policies. I hope they might do so in the future for the greater benefit of the country and the people, otherwise the present levels of poverty (those earning less than $ 2.5 per day made up 32.1% of the population in 2012/13, World Bank) may persist or increase.
Low Foreign Direct Investments
There were, however, shortcomings in these policies of the present Government and in their implementation. One of them is the assumption that investments, particularly FDI, will flow into the country because good governance has been restored by the 19th Amendment to the Constitution and if trade agreements are signed with countries such as Singapore, India and China.
FDI, especially the manufacturing types, have been avoiding Sri Lanka for several decades, most probably due the risk created by the unstable political environment resulting from the ethnic conflict and the 30-year war with the LTTE.
Even after the war was won in 2009 and also during the term of the current government, investments did not materialise as the FDI perhaps felt that clashes or war may break out again as history tends to repeat itself. See the table below (the Government’s promise of providing a million job opportunities to Sri Lanka’s youth therefore could not be kept).
Such clashes did take place even recently. The fuel for such clashes is the unrealistic tribal fear on the part of a large section of the majority community that the minority communities, especially of the North, may form a separate state if equal rights are given to them.
The political party that scored a massive victory at the recent local government elections may have used this fear and the anger against the failures of the Government to harvest the votes of the majority community.
The reason for this is the fact that the leaders of the present government failed to explain to the people that prosperity creating large investments will not be made until certain problems, that create a risk against investments, are settled forever; one of them is the ethnic problem, another being the absence of politically-neutral, efficient and effective public institutions as officials are still appointed on political affiliations and not on merit, the extensive ‘red tape’ and still another is the rapid spread of the cancer of bribery and corruption.
One of the promises of the Government to solve these problems was a new constitution guaranteeing equal rights to all including the minority communities and granting devolution of power to the provinces mainly to settle the ethnic conflict and generally to establish good governance, law and order, with efficient and effective public institutions capable of serving the people, obviously to create a nation capable of becoming a ‘lttle tigre’ economy (the need for it was never explained to the people and unfortunately it did not get off the ground and hopes of coming up again are dashed now that forces opposing such a Constitution have won the local elections).
Bribery and corruption
Instead corruption proliferated. It appeared that even leaders of the Government and officials got involved in bribery and corruption when they should have been above suspicion. The details and the extent of corruption during the previous decade were first documented in 2007 by the publication, ‘The Impact of Corruption on Poverty and Economic Growth’ by a team led by (the late) Prof. A.V.D de S. Indraratna and later in 2016 by me in the book titled ‘Export Competitiveness and Poverty Alleviation in South Asia, with special reference to Sri Lanka’.
The former concluded that public corruption could be estimated at 9% of the GDP (of $ 81.3 billion in 2016); the latter hints that it could be very much more than 9%. It appears that ministers in the current government, as in the previous one, prefer to implement large construction projects where they could enjoy massive commissions instead of projects (similar to the very popular and successful Gammedda village development program implemented by the Sirasa TV channel under the Maharaja Organization) that benefited the poor.
They made it worse by delaying the punishment of the members of the previous government guilty of fraud and other crimes as promised at the last general elections and getting involved in a massive bond scam. These are two of the major reasons for the large-scale rejection of the current Government at the recent local elections.
Decline in exports
Another shortcoming in the policies of the present Government was the assumption exports have declined due to the lack of markets abroad. This is why a lot of effort was made to sign trade pacts with a number of countries.
A visiting Harvard University professor attributed this, at a recent seminar, to the increase in import tariffs/duties, which he stated are in fact taxes on exports. However, it was pointed out to him that exporters in Sri Lanka are exempted from paying taxes on imported inputs used by them. His conclusion therefore is incorrect. Actually the reason for the decline in exports could be due to the absence of sufficient capacity to produce goods and services as investment especially by FDI did not take place as described above .This compelled people to take to agriculture, clearing even forest reserves.
In fact over 27% of employment is in agriculture and the extent of primary forests has been reduced 2.6% (FAO, 2010) of the total area of the country. The excess employed in agriculture could have been reduced/absorbed if manufacturing industries had been set up, thereby the productivity of agriculture (agricultural value added per worker in Sri Lanka $ 1,487, in Malaysia $ 19,818 and in Singapore $ 76,144, World Bank, 2015) also could have been raised.
Another method of raising agricultural productivity and reducing rural poverty is consolidation of the small uneconomic farms which were reported to be over 45% of the total number of farms according to the Agricultural Census of 2002, by creating a land market by giving ownership of the land to the farmers.
Failure to reform the system of education
There are two more shortcomings in the policies and the performance of the present Government which contributed to the reluctance of investors both local and foreign. They are the abject failure to reform the system of education to provide the technical and soft skills demanded by businesses. The foundation for technical skills could be provided by the so-called STEM subjects or science, technology, engineering and mathematics.
The soft skills include creativity, ability to work as a member of a team and deliver on targets, leadership, communication, especially in English, etc. The other failure is to develop infrastructure like the supply of uninterrupted quality electricity particularly to industries and paved/macadamized roads free of traffic congestion.
Absence of compassion for the poor
However, the major reason for the defeat of the Government was the fact that its leaders were unable to show compassion for rural people, estimated to number 17 million, whose basic needs have not been satisfied.
The examples are the failure to reduce the cost of living, for instance by managing government expenditure carefully (especially by reducing the enormous losses incurred by the state-owned enterprises mainly due to corruption and a policy of appointing officials on political affiliations and not on merit so that indirect taxation levied on goods and services used by the consumers could be reduced), inability to provide clean drinking water, fertiliser to paddy farmers at the correct time and the abject failure to provide solutions like the repair of irrigation works for the benefit of those suffering from drought which may have occurred due to climate change.
In fact the Government has to be blamed for not implementing its plans for economic growth for increasing job opportunities and incomes due the failure to take quick decisions and poor follow-up of projects.
Conclusion
The Government can, however, redeem itself in the two and a half years left of its term in power by at least laying the foundation for faster economic growth and poverty alleviation. For this purpose it has to correct its policy mistakes mentioned above, particularly the reduction of the risk against investments mainly for production of manufactured goods and services for export, by adopting land reform to improve the productivity of agriculture, by adopting a caring attitude towards the people whose basic needs have to be satisfied and reducing corruption substantially.
Above all, it has to explain the benefits of these policies to the people in a language they understand to get their co-operation and consent. Otherwise the social disorder that may be created by the attitude of the Opposition political parties winning the recent local elections towards the ethnic problem and their advocacy of protection of domestic firms as against an open social market policy would help to neither bring prosperity nor alleviate poverty in the country. But people and policies could change.
(The writer is a development economist)
25/02/2018
fter about two weeks of a political melodrama - filled with tension and turmoil or even elements from a detective fiction novel - the drama came to a climax yesterday with the swearing-in of new Cabinet Ministers, State and Deputy Ministers. 
performance and discharge of his powers, duties and functions under the Constitution and any written law, including the law for the time being relating to public security,’ HE’s wings clipped? 
