Colombo Telegraph

A Peep Into Past 99 My Views: Core Economic Principles Always Matter

By W.A. Wijewardena –

Dr W.A. Wijewardena

Economics is material

Today’s My View marks the 100th contribution of its series published regularly as a column in this paper for nearly two years. Hence, it is a fitting occasion to peep into some of the important My Views so far published and make a frank assessment of how they have contributed to enhance readers’ understanding of current economic issues. The sub-tagline ‘Economics Matters’ in the main title of the Column suggests that everything – whether it is political, social, historical or religious and not necessarily economic – can be explained in terms of the core principles underlying economics. This is what the past My Views did – analysing important current issues by using economic fundamentals and thereby stressing the point that economics is relevant and material for understanding the problems at hand.

Free debate makes everyone wiser

The objective of My View has been to address the lay readers – so that it would facilitate them to have a better understanding of the issues – and not the professional economists. However, from the comments and the response of the readers, it appears that the past My Views have got the attention of both groups, earning praises as well as provoking criticisms. Criticisms are welcome more than praises because they lead to a free discussion of the issues analysed in the series thereby providing an opportunity for readers to weigh both sides of the argument and make a judgment of their own. When a society permits criticism, as argued by Nobel Laureate Amartya Sen in his 2005 book The Argumentative Indian, everyone ends up wiser and for this reason, ancient Indian society has welcomed and tolerated even the worst type of criticisms.

The criticisms levelled against this writer have been of two types. One is that he is a stern critic of the policies pursued by the present government. The other is that he is propagating the neoliberal economic policies which are now dead and abandoned by many nations.

The mission of My View was to show the other side of the painted picture

The objective of this writer has been not to criticise the policies of the present government but to point to the readers that there is another side to the stories that are being presented to them by various policy authorities. Understandably, the policy makers would present only their side of a policy, highlighting its virtues and overlooking its deficiencies. Though good economic governance requires them to present both sides to keep the public informed of the potential risks involved in the policies pursued by them, the practice has been to paint only the good side of the picture leaving the public in the dark with respect to its unpalatable side. But this has been a common practice followed not only by the policy authorities but also by marketers of goods and services. To rectify the imbalance, the state regulators have made it mandatory for marketers to make a full disclosure of what they propose to market to the public. For instance, to protect the gullible public from one sided marketing schemes carried out by banks and debenture issuers, the Central Bank in the case of banks and the Securities and Exchange Commission in the case of debenture issuers have made it mandatory for financial institutions to disclose, among other things, the effective lending rates in their advertisements and for debenture issuers to present a risk analysis of a proposed debenture issue in the prospectus to be issued to potential investors. The need for policy authorities to observe the appropriate economic policy governance by permitting a free debate on economic policies was highlighted by this writer in a previous My View under the title “Economic Policy Governance: Listen to Sane Voices before it heads for disaster”.

The Buddha: A critic should not be maligned

In the My View referred to above, quoting the Buddha and Emperor Ashoka, this writer emphasised that the goal of a debate is to ascertain truth and not to win it by any means: “The Buddha for instance in the 6th century BCE has laid down the ethical principles of debate when one bhikku is accused by another bhikku which eventually becomes a debate to ascertain the truth. In the Anumana Sutra in the Majjima Nikaya, the Buddha has preached that one should not try to cover up the charges against him by making counter charges or diverting the debate to some other irrelevant aspect or expressing anger, hatred or displeasure or insulting the character of the debater opposed to him. In other words, when a public debate takes place on a public policy, the motive should be to ascertain the truth and not to win the debate by any means. It would help all those who participate in the debate and those who watch it end up wiser. Four hundred years after the Buddha, Emperor Ashoka who later became a Buddhist disciple codified these principles to laws in Ashoka inscriptions and one such principle he has laid down is that ‘the opponent in a debate should be duly honoured in every way on all occasions’”

Hence, what this writer has done is to bring out the other side of policies which the policy authorities are required to do voluntarily but refrained from doing so, though full and correct disclosure is a requirement which they have prescribed to their own customers. My View has, therefore, as the Buddha has advised his Bhikkus in the Aavaasa Sobhana Sutra in Anguttara Nikaya, sought to help readers to see beyond what is presented to them by news makers who have a personal interest in coming up with only one side of the story.

Core economic principles not owned by neoliberal economists

This writer has been labelled a ‘neoliberal economist’ by critics. The reason may have been the emphasis he has placed on the free market economy system to manage economic affairs of a nation instead of driving an economy through active intervention of the government. Neoliberal economic policies too give a higher weight to free market economy and liberalisation and a lower weight to government intervention for durable and sustainable economic prosperity. Experience in Sri Lanka as well as in other countries has shown that governments can generate economic prosperity through hard and active intervention but that prosperity does not become durable and sustainable unless it is taken over by markets and people driven by profits. Economists have attributed several reasons to this government failure.

Government failure One: Absence of business plans

One is that governmental authorities do not have proper business plans to run an enterprise profitably and as a result, it soon becomes a burden to society. Kautilya, the 4th century BCE Indian economist who lived 2000 years before the onset of the current neoliberal wave said that such loss making state enterprises eat up not only the Treasury of the king but also the labour that is used in such enterprises and warned the king to prevent its occurrence at all costs. A good example is Sri Lanka’s two airlines, Sri Lankan and Mihin Air. The massive losses in both these ventures in the past few years, as reported by both the Ministry of Finance and the Central Bank and noted by the Committee on Public Enterprises, have been a drain of scarce resources from the Treasury which is hard pressed for funds even to maintain its day to day running expenses of the government.

Government failure Two: Non-observance of economic governance

Another reason for the failure of government economic projects is the non-observance of good economic governance principles by them. They are not responsive to public criticism and do not take measures to amend their mistakes. This writer in a previous My View titled “A Tale of Four Airports and Three Airlines” brought to the notice of authorities how Sri Lankan Airline had put its passengers into difficulty by cancelling flights without notice or making alternative flight arrangements. This article was based on the experience of the writer himself and it contrasted Sri Lankan’s poor service standards from the superb services provided by the Malaysian Airline. The Sri Lankan Airline kept a strangely unusual silence over the whole story. Then, in this year too, a Sri Lankan Airline flight to Colombo had returned to the Bangkok Airport one hour after it had taken off due to engine troubles leaving the passengers stranded inside the airport for 12 long hours. This has been a frequent recurrence in the Sri Lankan Airline in the recent past.

Government failure Three: Availability of free money

A third reason attributed to government failure is the comfort enjoyed by those who run government projects that funds are available for them to absorb losses in unlimited amounts from the state Treasury. The Treasury itself has subscribed to this comfort feeling by supplying funds to loss making enterprises periodically to clean their balance sheets and thereby helping them to circumvent the accounting standards by window-dressing their business operations. A good example is, once again, the two airlines of the country. Thus, managers of state projects do not care about making losses and losses are treated as inevitable results of the business operations of government enterprises.

Hence, economists have advocated that the governments should give up doing commercial businesses and allow the profit conscious private sector to undertake them. This writer follows this view of economists; but, ironically, neoliberal economist school too has advocated the same.

Sri Lanka’s policies conform to neoliberal policies

However, this writer in a previous My View titled “Sri Lanka’s Budgetary Policy: Blending Neoliberal Model with Revived Chartalism or Modern Monetary Theory” has argued that even the current government policy in most respects has conformed to neoliberal model though it has claimed that its policies are home-grown and free of neoliberal policy prescriptions.

The following paragraph from the My View under reference brings out this point.

“Sri Lanka’s budget has tried to reduce its deficit and debt levels over the medium term from the current levels as recommended by neoliberal economic models. At the same time, it tries to keep the government’s consumption expenditure at bay by containing salary and pension expenses and increasing expenditure on education and health and infrastructure, another recommendation of neoliberal policies. The reduction of tax rates, the expansion of the number of people who pay taxes and encouragement of foreign direct investments and public-private partnerships are also important components of neoliberal policies. It also announced greater flexibility in the exchange rate, another measure recommended under neoliberalism. The government encourages FDIs, vows to ease doing business and promotes public-private partnerships which are also prescriptions of the neoliberal model. It also has liberalised trade by getting into free trade agreements with neighbouring countries and reducing the overall tariff level to less than five percent. By charging for the use of the Southern expressway, it has established that there is no such thing as a free lunch”

My View and the exchange rate crisis

When Sri Lanka’s authorities had stuck themselves to a policy of keeping its exchange rate appreciated despite the country’s loss of foreign competitiveness due to an appreciation of the rupee in real terms, this writer in a number of My Views cautioned the authorities against their declared policy. This writer said that Sri Lanka would fall into a serious budgetary, monetary and external sector problem, commonly known as a macroeconomic imbalance, if this policy is pursued by losing the country’s foreign reserves and borrowing from abroad on commercial terms.

In a My View titled “Appreciating Exchange Rates: Not a boon always” and published in September 2011, this writer argued that “The current year, 2011, is going to be a bad year for Sri Lanka. Though its exports have been projected to rise to a record $ 10 billion level, imports are projected to rise to a still record level of $ 18 billion (actual for 2011 was $ 20 billion) generating a massive trade deficit of $ 8 billion (actual was closer to $ 10 billion), a significant increase from the previous year’s deficit of $ 5.3 billion. This deficit cannot be fully funded by remittances which too have been projected to come closer to $ 5 billion for the first time in Sri Lanka’s history. Hence, the country’s much boasted foreign reserves of $ 8.1 billion are in a very critical state of fast erosion, unless the country goes for a massive foreign borrowing to top up its already raised sovereign borrowing of $ 1 billion made in August”

In the same My View, the writer concluded that “All signs in Sri Lanka, therefore, show a brewing pressure within the system for the Rupee to depreciate. The authorities have so far averted it pumping the borrowed Dollars to the market in large amounts. But, that kind of a strategy, though it appears to be soothing in the short run, locks a country in a ‘double jeopardy’, the escape from which becomes quite a feat”

Shocking the economy with cold turkey policies

The policy authorities were adamant to take any policy correction at that stage. However, as the subsequent events have shown, the authorities had to give up their grip on the exchange rate and allow the rupee to undergo a massive depreciation delivering an unexpected shock to the economy which this writer again commented on in a My View titled “Exchange Rate Flexibility and Fuel Price Increase: Shocking the economy with Cold – Turkey Policies” and published in February 2012.

This writer commented in the My View under reference as follows: “The need for making these changes had been felt by the economy for a long time and therefore the problem had accumulated to an explosive level because of the obsessively tough position taken by the Central Bank with respect to the exchange rate and the adoption of a loose monetary policy amid inflationary pressures to promote economic growth and thereby double the per capita income in 6 years. From the Government’s side, there was an unwillingness to displease the public by going for bitter economic policies. But when the problem became acute and could not be postponed any more, all these changes were made in one swift movement which economists call adopting ‘cold-turkey macroeconomic policy measures’. Due to the repeated assurances about a well performing economy which the authorities had been giving the public in the past, many had driven themselves to a ‘comfort zone’ in the belief that there was no need for worrying because the future was so promising. But the recent public policy changes in a cold-turkey manner have delivered a shock to them requiring the whole economy to make a massive readjustment in the behaviour and living of people”

So, the adjustment done in a cold-turkey manner by Sri Lanka’s authorities after they felt the real heat of the problem was necessary, but it was done in a wrong manner.

The brewing fiscal crisis in Sri Lanka

My View had in a series of articles commented on the brewing tax and fiscal crisis in Sri Lanka but the authorities appeared not to notice the warning. In a My View titled “The Brewing Crisis of the Tax State: Stimulus for prosperity or austerity for sustainability” this writer warned against the continuation of the expansion of the government out of borrowed money in an open economy because it would lead to an external sector crisis. This was published in July 2012. Then, when the fiscal crisis became uncontrollable, in October 2012, this writer warned in another My View titled “Sri Lanka’s emerging fiscal cliff: Are we to fall off the cliff or fly over it?” that unless correct policies to shrink the government are taken, Sri Lanka cannot avoid from degenerating to a serious economic crisis in the future. This warning has not been taken seriously and only the future will tell whether this writer will be proven correct or not.

Thus, core economic principles used by this writer are public properties and valid at all times. They are not owned by a particular school of thought.

*My Views referred to in this article can be accessed at http://www.ft.lk/category/columns/w-a-wijewardena-columns/ . W.A. Wijewardena can be reached at waw1949@gmail.com

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