29 September, 2020

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Good Governance Incomplete Without Effective Mechanism For Economic Policy Governance

By W.A Wijewardena

Dr. W.A Wijewardena

Dr. W.A Wijewardena

Restoring good governance in the political sphere was the main promise made by the incumbent President at the presidential election in January 2015. It was considered that good governance would usher a new era to Sri Lanka by paving way for the creation of justice-based rule and a society responsible and accountable for its actions. 

Now that the election is over and a new President is in place, all systems are being directed toward introducing political reforms but the promise has been delivered only halfway through. In this political reform exercise, what is missing is the introduction of an effective mechanism for assuring economic policy governance without which good governance exercise becomes incomplete.

Good economists and bad economists

The rationale of economic policy governance could be explained by drawing on the viewpoints expressed by French economist, philosopher and legislator Frédéric Bastiat in two of his publications, one in 1848 and the other in 1850.

In the first publication, ‘Selected Essays in Political Economy’, Bastiat has distinguished between a bad economist and a good economist. A bad economist would see only what is seen at the moment and upholds a policy if it contains, at the very first glance, perceived benefits to society. A good economist would see through the effects of the policy that would come subsequently as well. Since such subsequent effects cannot be seen, they have to be foreseen. A good economist, therefore, confines himself to both seen and to be foreseen.

Economic policies which are being implemented by those economists in the government bureaucracy tend to overlook this ‘to be foreseen’ aspect because such an approach does not serve the objective of their political masters, namely, political expediency. Hence, they uphold only what is seen. If ‘to be foreseen aspects’ bring in unsavoury effects, the policies pass unexpected miseries on people who are supposed to be supported by them. Hence, it is necessary to assess both the ‘seen aspects’ and ‘to be foreseen aspects’ before any policy is introduced. This is the starting point of economic policy governance.

Legal powers of governments are to protect property and not to destroy it

Bastiat in his 1850 publication, ‘The Law’, has remarked that law is simply “the collective organisation of the individual right to lawful defence”. The right referred to here is the right to person, liberty and property. The lawful defence involves the use of force to defend oneself and not to destroy the right of another to his person, liberty and property.

“And this common force”, says Bastiat, “is to do only what the individual forces have a natural and lawful right to do: to protect persons, liberties, and properties; to maintain the right of each, and to cause justice to reign over us all”. In such a society, according to Bastiat, order will prevail among the people in thought as well as in deed. It therefore, carries rights as well as responsibilities: right to protect oneself and responsibility not to destroy another’s. If the government does not intervene, says Bastiat, it would cause to develop a system in which people’s wants and their satisfaction would develop in a logical manner.

Explains Bastiat this logical manner in The Law: “We would not see poor families seeking literary instruction before they have bread. We would not see cities populated at the expense of rural districts, nor rural districts at the expense of cities. We would not see the great displacements of capital, labour, and population that are caused by legislative decisions”

Labouring painful, but plundering easy

Bastiat remarks that man can live and satisfy his wants by using his labour and mental faculties to natural resources ceaselessly, thereby giving birth to ‘property’. But man can also acquire property by plundering those developed by others. Since this is the less painful and easier way to acquire property than expending one’s labour, there is a natural tendency, according to Bastiat, for plundering rather than labouring. Because of this natural tendency, Bastiat says that neither religion nor morality can stop people from resorting to plundering of property owned by others.

Though the force of law is to be used to stop plundering of property, alleges Bastiat, those who wish to plunder would acquire power to make laws that enable them to engage in lawful plundering. The result is a chain of events that converts law, instead of an instrument of protection, to an instrument of lawful plundering.

Governments exact private resources

Modern governments, for practical reasons, cannot be relegated to laissez faire governments with least intervention in the economy, though that has been the most ideal form. Hence, powers have been given to governments to frame economic policies to lead nations to prosperity, a common goal of all nations. These powers enable governments to exact resources from society through taxation, coercive expropriation or generating price inflation in the economy and expend the same back on society.

The criterion to be used by governments in this seemingly public good delivering exercise is simple: What is delivered to society should be more than what is exacted from it. But these powers, contrary to the good intentions they underlie, could be abused by bad economists in authority. They could just highlight only what is seen and put into effect systems that permit lawful plundering of property developed by one class by a class they favour. Such bad economic policies bring in a loss to society on a net basis highlighting the need for establishing proper economic policy governance systems.

Institutions are values and beliefs in society

In modern times, plundering of economic resources has been explained as the cause for some nations to fail while others to succeed by two economists, Daron Acemoglu of the Massachusetts Institute of Technology and James A Robinson of Harvard University. In their 2012 book, ‘Why Nations Fail: The Origins of Power, Prosperity and Poverty’, the two economists have argued that it is all to do with the nature of institutions a country has. Institutions for economists are not the institutions which are commonly meant in society.

In economics, they mean ‘the rules influencing how the economy works and the incentive structure that motivates people to do what they do’. In other words, institutions are simply the values, beliefs and behavioural patterns that guide a nation as a whole. This is equally applicable to individual units functioning in an economy such as a family or a company and to their aggregation at national levels which are called nations. They have called the type of institutions that cause nations to fail as ‘extractive economic institutions’; in the opposite, those who contribute for nations to succeed are called ‘inclusive economic institutions’.

A classic example, according to Acemoglu and Robinson, to illustrate this has been provided by North Korea and South Korea which are made of the same ethnic stock, the same geographical attributes and the same natural endowments.

North Korea drives youth to despondency

Teenagers in North Korea are beset by a common institutional structure: growing up in poverty without entrepreneurial initiative, creativity or adequate education that equips them for skilled work. The accepted value system is that even if one works hard, one is not able to enjoy its fruits since it is immediately appropriated by the state. It forces some of them to get into illegal economic activities which are high cost and high risky. For others, it is a life of despondency.

But in the South, the youth have prospect of growing up into success through good education and excellence in chosen vocations. They are aware from early in life that if they are successful as entrepreneurs or workers, they can enjoy the fruits of their hard labour. They have the prospect of improving their standard of living. The institutional structure in North Korea is extractive while that in South Untitled-2Korea is inclusive.

In extractive institutional systems, the state plunders the fruits of hard work by its population through various devices and apportions them among those who support or are made up of the top echelon of the government. Say Acemoglu and Robinson: They are “extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset”.

In contrast, “inclusive economic institutions create inclusive markets which not only give people freedom to pursue the vocations in life that best suit their talents but also provide a level playing field that gives them the opportunity to do so”.

Facilitating politicians prosper extracting economic institutions

Acemoglu and Robinson say that extractive economic institutions are prospered by the type of the political setup prevailing in a country. If the political parties or those who lead political parties wield exclusive political power, that is, only they could engage in illegal acts with impunity and not others, the whole economic system is converted to an institutional system that preys on others to sustain itself.

Extracting resources from others is considered a normal and moral activity by politicians and those who are around them. The values that are implanted into the psyche of all those in society have only one element. That is, robbing from society, either through government or through the market by means of franchises bought from politicians, is a normal legitimate activity. In such a system, misusing state property for private gains is considered an innocent activity which should not be an offence to be handled by law enforcement authorities or an immoral act to be discussed publicly by civil society. Thus, all institutions in government or in civil society are converted to instruments supportive of extraction.

An example was the recent downplaying, by the former President as a very trivial act, of using some 20 odd vehicles belonging to the State for private commercial gain by a top politician in Sri Lanka. Such intolerance of the acts of extraction supported by its justification in public leads to the establishment of a value and belief system endorsing what extractive economic institutions do in society.

Wholly inclusive economic institutions are the best

Economic policies can create either extractive institutions or inclusive institutions or a mixture of both. Extractive institutions will plunder resources from beginning to the end. Inclusive institutions will prosper resources and allow citizens to enjoy the fruits of their labour.

The mixture of both extractive and inclusive will provide a better deal to society depending on the relative importance of the extractive side or inclusive side in the whole institutional structure. If the extractive side is preponderant, then, it is as bad as extractive institutional setup created by the first type; in a setup where inclusive type is preponderant, it is still acceptable though it is not the ideal setup which a society should aspire to have. That is because it does not allow a society to have the best for its future.

Dismiss extractive institutions

So, what is to be dismissed by a society is a structure in which institutions are wholly extractive or preponderantly extractive. What is to be aspired is a wholly inclusive institutional structure; a structure where inclusive aspects are preponderant maybe accepted as a temporary arrangement until a society moves to a wholly inclusive institutional structure.

Economic policies should not prosper extractive institutions

So, what is the responsibility cast on economic policy makers? They should avoid policies that lead to wholly extractive or preponderantly extractive institutional structures. If any policy leads to a structure where inclusive side is preponderant, they should have that policy under continuous surveillance so that they could adopt measures to change into wholly inclusive institutional structures as the final goal of policy.

Contributors to extractive institutions

How could an extractive or preponderantly extractive institutional structure be established in society? There are two contributors. One is the general policy being implemented by the state favouring or promoting economic extraction. The other is the individual policies that permit one setup of society to extract economic resources from another setup.

Governments’ failure will generate extractive institutions

In the first case, governments’ failure to uphold three good governance requirements will change the entire value and belief system in society. They are the non-observance of the rule of law, violation of property rights and toleration of bribery and corruption in society. When these bad elements are supported by the prevailing exclusive political setup, the nation descends to a perilous state.

The program to introduce constitutional reforms in Sri Lanka after the presidential election in January 2015 sought to address this issue. The implementation of the program only halfway through so far has denied society the benefit which it sought to bring in. Hence, the system of governance in Sri Lanka today is not different from that prevailed prior to presidential election in January, 2015. As such, the country has the same risk with respect to economic policy governance.

Economic policies should be made by technically qualified experts and not politicians

The individual policies are in the hands of the economists working under political authorities. If they fail to assess the outcome of a policy as it pertains to today as well as in the future, the overall impact of the policy, whether it is wholly extractive, wholly inclusive or a mixture of both, is not taken into account. This is the working of the bad economist referred to by Bastiat. The result is a net loss to society.

To prevent such a net loss, economic policy making should be handed to a group of technically qualified individuals instead of leaving in the hand of a single official or a single politician or a group of politicians. Such group assessment will prevent the implementation of policies that do not bring in overall economic benefits to society. Hence, economic policy makers should be made accountable even after they leave office if the policies which they have implemented have brought a net loss to society by allowing one group of people to extract resources from another group of people.

Empower civil society to ensure economic policy governance

These are important requirements which have to be put in place in order to satisfy economic policy governance. Since it is unlikely that politicians would implement them on their own, it is important to empower civil society so that an effective voice could be made whenever there are deviations from the accepted policy.

*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, could be reached at waw1949@gmail.com.

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  • 3
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    Ranil Wickramasinghe is desperate for political power and is now on a spending spree to bribe voter, borrowing funds by issuing bonds and running the economy into the ground with Ravi Karunanayaka minister and a a corrupt governor of the CB..

  • 4
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    Dr. W.A Wijewardena

    RE:Good Governance Incomplete Without Effective Mechanism For Economic Policy Governance

    Yes, but we have is

    1. Double Standards

    2. Lack of Law and Order

    3. Accountability

    4. Most are after stealing funds.

    What kind of good governance was there when MR was in power?

    See what the University Teachers Association said during the Mahinda Rajapaksa Regime.

    The so-called “Intellectuals” , 200 of them gathered recently at Kandy are MaRa Shills who were paid by Mahinda Rajapaksa from the funds stolen from the people and from the loans by gutting the country in debt. The Shills and Intellectuals are not much different from Wimal Modawansa, of 2/2 =0 Fame.

    The words Intellectuals do not fit them. A more appropriate word can be selected from among the words, Modayas, Mootals, Fools, Idiots, Morons, Imbecile, Shills and “MaRa Dogs”.

    Listen in case you are lazy to read –(posted by punchinilame June 20, 2015 at 2:51 pm, in an earlier post)

    https://www.youtube.com/watch?v=kwFRgMySYBs

    (Statement by the United Front Of The Peradeniya University Lectueres And Alumni) when Mahinda Rajapaksa was in Power.

    Friends, time has come to educate one another about the massive corruption that happens in Sri Lanka under the Present (Mahinda Rajapaksa) Regime. The Executive has taken the lead in this process resulting in massive debt, virtually mortgaging our mother land to foreign countries. Each individual and even the unborn in Sri Lanka owes close to Rs 400,000.00 as debt to China and other lending agencies. Country is in the threshold of bankruptcy.

    Today more than 50% parliament members have not even passed the O/L examination. Present regime has no respect for education. Country’s development could be achieved only by educating people. We emphasise that more than 6% of the GDP need to be allocated for education, which the emerging new leadership has promised. Hence we strongly feel that the present regime should be removed for a more thoughtful, compassionate and considerate leadership to take reins to spearhead this beautiful nation to be a DEVELOPED NATION devoid of corruption, family favouritism and protected independent Judiciary. This Government ………

    1. Promised that the presidential system will be repealed, in the “Mahinda Chinthanaya”, instead extended the number of times a president could contest from two times to unlimited.

    2. Robbed around 95 Million LKR from the “Tsunami” fund ( Helping Hambantota ) donated by the Japanese government. This was his first political robbery apart from what he made as the Minister of Fisheries.

    3. Let all the ministers of his cabinet to rob at their will, hence he could blackmail them. He turned a blind eye when his Prime Minister imported Drugs and few members of his cabinet importing illegal ethanol and drugs.

    4. Alienated the country towards China resulting in India developing bitterness with Sri Lanka.

    5. Obtained loans from China at rates higher than Libor (London Interbank Offered Rate) to earn commissions. These commissions in billions were routed to Swiss bank accounts via Seychelles, where MR opened a branch of Bank of Ceylon and also an Embassy in a country where only 92000 thousand people live. Sri Lankan airline flies to Seychelles.

    6. Built a port where no ships come. Air Port where no Airplanes land. He made billions of commissions doing these projects.

    7. Made money building Roads : The cost per km of the Outer Circular Highway from Kadawatha to Kerawalapitiya financed by China is US$ 56 m(Rs.7.3billion) This cost is three times higher than the Kottawa Kaduwela extension of the Southern Highway financed by Japan ,which is Rs.2.4 billion per km.

    8. The cost per km of Extension of the Southern Highway from Mattala to Hambantota will cost Rs.2.14billion, whereas per km cost of the Southern Highway cost only Rs.975m

    9. Bid price of A9 road was Rs.140 m per km when the departmental estimate for an A class road was Rs. 20m.

    10. Construction of the Norochchole Coal Power Project was awarded to a well- established Chinese contractor at US$280.00M in 2005 by the previous regime. Soon after present regime came into power it cancelled the contract and awarded it to another inexperienced Chinese firm at US$520 million-almost double the previous price. Plant is inoperative even after 2years of completion.

    11. On a dispute between Essential Services Commissioner and Asset Maritime (Pvt) Ltd arbitrator-a retired High Court Judge awarded Rs.600,000.00 as compensation to the company. A Committee appointed by the President on the intervention of the First Lady awarded Rs.180 million to this company owned by Dhammika Perera and Nishantha Wickramasinghe- latter being a brother of First Lady.

    12. Due to the ill-conceived Hedging deal of the Ceylon Petroleum Corporation headed by Asantha de Mel (a person connected to the political establishment) lost Rs. 230 billion in2007. No one has been held accountable for huge loss of public funds. 13. Failed to initiate investigations on 29 journalists murdered or disappeared. Lasantha W, Pradeep Eknaligoda

    14. Failed to initiate investigations into the deaths of Members of Parliament 1. Raviraj and one other.

    15. Appointed 38 numbers of the Presidents family and extended family, to diplomatic missions.

    16. Turned a blind eye on losses at Mihin Air to the tune of 6-8 Billion, made by his closest buddy Sajin vas Gunawardane who had been criminally charged previously. He appointed his brother in Law Nishantha Wickramasinghe to Sri Lankan Airlines who has no formal education and made losses to the tune of Rs 70 billion to date.

    17. Influenced the judiciary to President’s benefit. Impeached the 43rd Chief Justice for no reason. Makes judicial appointments to his benefit.

    18. Allows Presidents children to play (Car races) on the streets of Colombo at their will by closing roads. He over ruled Mahanayake Theroes to hold car races for his children in Kandy town.

    19. Failed to nominate Election, Police, Public Service and Judicial services commissions.

    20. Udayanga Weeratunga – Sri Lankan Ambassador to Russia. Cousin of President Rajapakse. Accused of involving in a shady deal to purchase MIG Fighters for the Sri Lankan Air force.

    21. Paid 700.00Million rupees to Prabhakaran to purchase weapons to kill innocent Sinhalese using Karuna Amman who is now a deputy Minister and a Vice President of the SLFP. He uses Kumar Pathmanathan alias LTTE arms dealer to his personal benefit.

    22. How Karuna was sent to London “ On August 30, 2007 the Department of Immigration and Emigration issued a diplomatic passport number D1944260 in the name of “Kokila Dushmantha Gunawardena” whose occupation on the passport was given as Director General of Wildlife Conservation. The photograph on the passport was that of Karuna Amman. The Department of Immigration, it is pertinent to note, comes under the Ministry of Defence, Public Security, Law and Order of which Gotabaya Rajapakse is Secretary and President Rajapakse the Minister”.

    23. Failed to conduct an impartial inquiry into killing of around 43 prisoners at the Welikada Prison.

    24. Did nothing to improve the economy and failed to introduce workers charter. Economy in shambles.

    25. Arranged for his son to sit for the Law exams in an isolated air-conditioned room, away from the other candidates.

    26. Killed protesters in Rathupaswala (8), Free Trade Zone (1) and Chilaw (4). He used maximum force on all protestors.” Lets be happy that a rising Dictator was “killed” on 08-01-2015

  • 0
    2

    Dr Wijewardana must have been on Sabbatical since the Election.

    Otherwise how could he have missed the Yahapalana Economic Policy Framework which started with the biggest Billion Bond Issue.

    I mean Yahapalana architects needed the dosh to kick start the Economy.

    After Rajapaksa left them nothing to spend… Right.

    So Yahapalana second boss gave his Vellala mate the tick.

    And the Vellala mate obtained not 10, 0000 Mil but LKR 15,000 Mil all up, at the special rate of 13 % when the going rate was only 9.85 % max.

    Yahapalan bosses needed the dosh to get the Big A Economic projects restarted after changing the contractors with new commission arrangements.

    Plus they needed something on the side for Yahapalaya Mk 2 which is going to roll in soon.

    Then they jump started the Krish Square after the Yahapalana FM shook hands with the GTF, who have promised to finance everything to help the inhabitants become prosperous, loyal citizens who act like the GTF gentlemen.

    They are now handing out LKR 50,000 to rural Buddhist Temples to review the Temple Industry as well.

    What more can they do..

    I mean it is only 6 months

    Give them a break will you….

    • 2
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      K.A Sumanasekera

      “Dr Wijewardana must have been on Sabbatical since the Election.”

      We want you too go on a sabbatical for an extended period. An extended spell will do you good.

      Come back and share your experience with us. Forest monks are real Buddhists and they don’t treat champagne socialist any differently to Dalits.

      They can build you into a human being.

  • 1
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    A quote from FB

    In other countries

    Uneducated people are sent to school to educate them better

    Sick people are sent to Hospitals for treatments

    Drug and alcohol addicts are send to rehabilitation centers to rehabilitate them

    Rapists ,Racist, Thieves and Goons are sent to Prison

    In our country all the above are sent to Parliament

    Any kind of Good governance is possible only if our voters learn not to repeat this decades old tragedy

    • 2
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      Very unlikely with the make up of Sri Lankan’s especially the majority. Examples are there for all to see from the Executive, through the Legislature, Judiciary, Police, some of the Armed forces, Educationists, and the lot.

  • 0
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    Man what are u bubbling… right at the moment.. bottom line is to save the nation from pro-nationalitic fractions of the nation… that make every effort to pain the picture the anyone except Rajapakshe would betray the nation. That are their stories. It is very right current Prez MY3 making it very clear that no two leaders lead the nation in the same time. Mahinda Rajapakshe should be very clear, that he is doing a greater harm to this nation being entwined to those idiots like Dayan, Buruwanse etc showing that they are the ones who stand to protec tthe nation. All governtment tried by their way genuinely to protect the nation sofar. I really dont know that Mahinda did it in a different way.. as Dr. Amila thero repeats at the time Raja was elected to give the lead, he was chilled being feared to Ltters, had NOT the collective forces supported MR in strenghterning his hands… making him clear that the only wayout would be to go against the LTTE elemination… nothign would have achieved. Since then pro Rajapakshe media men painted the picture in favour fo Rajapakshe families. Those who analyse this today. are very clear, even today, there are the proxy rajapakhe media men work for him… it is his family ties made all the fradulent men of the nation stronger of their survivial. This is very very unfair..towards the lawful fraction of the country. There is a bigger majority than ever think.. that long for peace.. and harmony among the all forlk.. but Rajapakshe led radicalisms seems to be not giving real peace loving leaders to lead the nation. Either Rajapakshe should be brought before the international court or he should be prisoned for long term jail leaving the peaceful people of a the country a life.

  • 0
    0

    A debt based, usury economy can never prosper and DemoCrazy makes it worst. The system of governance is heavily flawed.

    Insanity is doing the same thing over and over again and expecting different result.

  • 0
    0

    As ususal Mr. Wijewardene has written on a very relevant issue. Unfortunately politicians at least some of them have this ability to sway people by their very sweet words delivered in a manner that strikes a chord in the majority of the people irrespective of their good or harmful nature for the welbeing of the wider community. A good example is is what is now going on in Tamil Nadu. The chief minister was charged among other things for misappropriation of public funds. But using every power at her disposal, she managed to prolong the case for 18 years and still got a verdict in her favour based on a technical interpretation of the law – exactly what percentage of wealth amassed by her could be defined as unlawful. The people could;nt care a damn. She was welcomed back in to their fold and is likely win back a seat in legislative majority by a huge margin.

  • 1
    0

    Wije

    We never had good governance before independence or after independence.

    MARA ruined the country and Ranil is no better.

    I am yet to hear from you about the CBSL bond scam. You were a critic of Nivard but no comments about the bind scam.

    I am worried that you are becoming like our politicians.

    Jagath

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