13 November, 2019

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IPS’s State Of The Economy Report 2018 Is A Demonstration Of Its Independent Analysis Of The Economy

By W A Wijewardena –

Dr. W.A Wijewardena

Economists blamed for failing to predict the present crisis

Economists are at the receiving end of society today when it comes to economic crises. They have been blamed not only for giving confusing advice, but also for failing to predict accurately the oncoming economic catastrophes.

Critics say that they have been good at analysing what has happened in the past. But, when it comes to future, their predictive power has been stunted. Their failure to predict the global economic crisis of 2007-8 has been an often quoted instance. The present foreign exchange crisis which Sri Lanka is undergoing today is another. The economists at the Central Bank have been blamed for the crisis not only by an ex-Minister of Finance but also by a former Governor and a former Deputy Governor of the Bank.

But IPS had predicted the crisis long before

Contrary to what many seem to believe, the present crisis had been predicted as early as 2011. All previous publications of the country’s independent think-tank, Institute of Policy of Studies or IPS, had drawn the attention of the government in power to the need for fixing the oncoming economic crisis in its State of the Economy reports released from 2011 onwards. The latest added to this series has been the Sri Lanka State of the Economy 2018 released last week.

In all these reports, IPS, working under the constraint of being a Government-owned think-tank, had politely but very strongly warned the Government of adverse consequence which the country would face if no urgent remedial actions were taken.

Track record of IPS

In its report for 2011, IPS had warned the Government of the risk associated with commercial borrowings to fill the foreign exchange gap created by high local demand for imports and other foreign services. The report for 2012, while recognising that infrastructure projects are useful to lay the foundation for economic growth, had emphasised the need for introducing the economy-wide reforms in order to come out of the ongoing economic crisis.

The report for 2013 was from a different perspective. While still maintaining that economic reforms are needed, it had critically analysed the state of the economy from the point of getting snared in what is known as the ‘Middle Income Trap’. Once a country gets into this trap, it cannot maintain its growth in competition with its peers because it no longer enjoys the benefit of cheap labour. It cannot move up either because it does not have the modern high technology to compete with rich countries. IPS had warned that if no reforms are introduced, it was inevitable that Sri Lanka would get into a serious economic crisis in the years to come.

The report 2015 had delivered a strong message to the Government that came to power in January 2015 that unless it would concentrate on fast-tracking economic reforms, the country would inevitably face dire consequences.

The State of the Economy reports for both 2016 and 2017, released after the present Government came to power, had emphasised the medium term challenges which the Government would be facing in its attempts at fixing the economy. The foremost of them were the slowing of the export growth, overhanging of external debt, low foreign direct investment flows and rising dependence on foreign borrowings to build foreign exchange reserves as well as gain capability for servicing the maturing external debt.

The needed policy reform, as the report for 2017 had outlined would be ‘some unpopular belt tightening measures’ and implementing ‘a set of painful policy adjustments to reverse the steady deterioration of Sri Lanka’s export competitiveness in international markets’.

I also in my regular articles in this series warned the Government of the impending economic crisis from around 2012. These articles were addressed to both the previous Government and the present Government. However, the response that I received was the display of a lukewarm attitude to the economy. What it proved was that an economist can take a horse to the water but would not be able to make it drink that water.

Continuation of the heritage of IPS by its new management 

The Sri Lanka State of the Economy 2018 has been released by IPS in this background. All the previous reports had been prepared under the direction of IPS’s Executive Director, the late Dr. Saman Kelegama, a fiercely independent economist. The present report has been prepared under the direction of his successor, Dr. Dushni Weerakoon, who had been mentored by Kelegama when he was its ED. Weerakoon has demonstrated in this report that under her leadership, IPS would continue as an independent think-tank without compromising its high ideals.

The theme of IPS 2018 report 

Every IPS report has a theme and the theme of the Report 2018 has been ‘Climate Change, Food Security and Disaster Risk Management’. All these are critical issues faced by Sri Lanka in the present background of deteriorating economic conditions. A country can think of taking measures to fix climate change only if it does well on the economic front.

Climate change is a global issue for which all the nations will have to be united to find solutions for it. However, if the domestic economy of a country is faltering, it will have to first fix that issue before turning to climate change. Given the present situation in Sri Lanka, it is natural that the country would choose economy instead of an unseen global issue like climate change. However, that global issue has a bearing on the prosperity of Sri Lankans in the long run. For that, a proper marriage between the economy and climate change is needed. IPS 2018 is an attempt made toward that direction.

Adverse climate change affects agriculture and food security

IPS report has summarised this position as follows: ‘There are unmistakable signs to indicate that Sri Lanka is a highly vulnerable country to climate change. In the recent past, the country has experienced climate induced disasters that bought about immense losses to economic and social life on a regular basis….Besides the damage caused by continuous onslaught of disaster events, an analysis of meteorological data indicates a gradual change in climate parameters all over Sri Lanka. An increase in ambient air temperature has been reported countrywide and observations suggest that the established patterns of rainfall are fast becoming erratic.’

Hence, the future projections of climate patterns show that Sri Lanka’s wet regions will become wetter and dry regions will become drier showing a polarised weather pattern. Therefore, it is necessary to take proactive measures to avoid catastrophes in this area in the future.

Double prejudices arising from affected agriculture 

Food security and disaster management are pressing domestic issues. Yet, they are highly related to changes in the climate. Hence, all three come together and have to be addressed simultaneously. Among key sectors, agriculture is likely to face the impacts of climate change most, says IPS.

While the subdued performance of the domestic subsistence agriculture would bring in severe shortages leading to food insecurity, the export agriculture would suffer from low output and its consequential corollary, low performance in exports. Both will affect the country’s balance of payments adversely.

Low domestic food production will require Sri Lanka to fill the gap through imports creating an unplanned drain of its foreign exchange earnings. This will also cause immeasurable miseries to rural farming population which is already living from hand to mouth. It will entail a serious social and economic cost on Sri Lanka.

On the other side, low performance in export crops will reduce foreign exchange earnings compounding the issue. Since Sri Lanka’s external financing still depends pretty much on the foreign exchange earnings by this sector, any unanticipated decline in foreign exchange earnings will be highly critical to Sri Lanka.

The IPS report has made a detailed analysis of how these two sectors would make Sri Lanka vulnerable to an impending economic crisis through climate change. The bottom line of the IPS report is that proactive policies should be taken by Sri Lanka to avert these adverse consequences. It is therefore, necessary to act today when the issue is still at a manageable level.

Needed policy measures

The necessary policies, according to IPS report, are numerous. It has recommended that climate change issues should be made a part of the national economic policy framework so that all economic policy measures which will be implemented by Sri Lanka will give due recognition to them. It will enable Sri Lanka to have a coordinated approach at climate change. It also involves a suitable adaptation strategy to mitigate the risks arising from climate change.

In the case of food security, IPS has recommended the introduction of farming practices that are suitable for more arid climates. It will also save water which is now a scarce input for farming. This was a point I raised in my previous article on the subject under the title ‘Resolving the paradox of rice-poverty amidst plenty: increase yield, eat less and divert surplus to industry’.

It was pointed out in this article that paddy farmers have to use about 2,500 litres of water to produce one kilogram of rice and about 1,000 litres of that usage get wasted through evaporation and percolation to the earth. But with erratic rainfall systems, water becomes scarcer and Sri Lanka should find varieties of paddy that war drought resistant and adopt farming practices that use less water. Unless this is done on an urgent basis, Sri Lanka’s paddy farming and paddy farmers will not be sustainable.

China’s Belt and Road Initiative

IPS report has provided a detailed analysis of China’s Belt and Road Initiative or BRI from the point whether it would be a sustainable economic partnership for Sri Lanka.

Economic relationships which Sri Lanka had with China date back to many thousands of years. Sri Lanka had exported elephants, ivory and spices to China while importing silk and other fine clothes from that country. After Sri Lanka’s independence in 1948, these relationships were renewed through a historic Rubber-Rice Pact in which China would buy Sri Lanka’s rubber at premium prices while supplying rice from international markets at a discount. This was a blessing for Sri Lanka in 1950s, 1960s and 1970s when the country was facing a severe foreign exchange crisis.

In more recent times, Chinese loans at market rates and investments have helped Sri Lanka to build its infrastructure facilities. These infrastructure facilities have been criticised on the ground that they are not economically and financially sustainable. Hence, in the new BRI, it is necessary that Chinese investments should be attracted by Sri Lanka by paying careful attention to their economic, financial and environmental sustainability. IPS report has emphasised on these requirements.

Five objectives of BRI 

There are five major objectives of BRI, as highlighted by IPS.

First, there will be policy coordination among the nations participating in the initiative. It will not only avoid conflicts and delays but also help countries in the programme to get the best out of economic policies. Second, people along the new belt and the road will be digitally connected enabling them to use advanced technology for commerce, interactive communication and exchange of views.

Third, there will be financial integration. Fourth, trade would be conducted among the belt and road nations without impediments. Fifth, it will enable people to have person to person contacts. This objective along with digital connectivity will help people along the belt and the road to develop as a unified group of Homo sapiens.

According to Oxford historian Peter Frankopan who has documented the history of the old Silk Road under his 2016 book titled Silk Roads, religions, faiths, philosophies and arts spread through the old Silk Road from China to the West. IPS has documented a number of benefits which Sri Lanka could derive through BRI in the form of increased trade, tourism, investment and so on.

Overall, the IPS report on the State of the Economy 2018 is presented in a readable manner with a host of infographs to illustrate its points. I see a weakness in the report because it is produced as a black and white document. But if it is printed in multicolour, it would definitely be more appealing to the readers.

*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1942@gmail.com

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Latest comments

  • 1
    0

    Dr. Wijewardane: Remember, even at CBK times, the Cry was Eat all three meals rice. Is that true. Mahinda Rajapakse also had same results. Only when it comes to Ranilm he was protesting with the loaf of bread at the stick end, Now, we have to import rice and britsh – planted coconuts. Economists did never do good to the world. they just theorize and all go wrong. for how many decades women in the middle east send money. I think it is over $ 5 billion. they earned a lot of taxes from PEtrol. what happened to those money. I hear, that Sri lankan businessmen are not brining what they earned as Foreign exchange wghich us used by politicians for foreign investment. How much is this ?Even though Ranil doe snot have money in his personal account, all his relatives have. There are so many who have foreign accounts.

    • 2
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      JD
      In CBK times bread was sold cheap in order to take pressure away from rice. Result was at least some nominal amounts of redundant rice were exported in 1995.

      Dr.WAW
      It is true and correct that economic analyses were there but predictions were not forthcoming. So it has been with political analyses by politicians. However, senior hardened administrators were alive to impending turmoil. As early as by late 1968, systematic study and review of ‘Naxalbari Type’ simmerings was put in place by Secretary Defense officially. The hierarchy being from grassroots Grama Sevakas to DROs to Kachcheri administration to Government Agents. The 22 GAs reported regularly. This stopped with the change of government in May 1970, perhaps on the understanding that ‘Dudley and the UNP can do no right’. April 1971 was the outcome.

      By latter part of 2008, at least some from the North foresaw the end of the war by mid – 2009. Preceding or following it was the economic implosion they prophesied. But it did not come to pass. It has escaped for a decade, but for how many more years?

      The late Mr. Sam Wijesinghe, well known for never mincing his words said this at SLIDA, when he addressed senior management grades; “Hitler came to power in inflation ridden Germany in 1933, drove a hardy people and in five years was able to challenge the world. What are we doing? CONNING AROUND”. Dead on target.

  • 3
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    Hats off to IPS for maintaining independence though attempts were made to buckle this!

    It was suggested that Lanka follow Malaysia’s model when its currency was depreciating by restricting capital outflows in a rationalized manner. IPS should invite Malaysia’s Dr. Jomo Sundaram and Dr. Dambisa Moyo to give lectures on policy alternatives to limit rupee crash and the economic crisis in Lanka.
    Would have been good if the external debt of Lanka was analyzed in detail as there is a lot of fake news about China being responsible for Lanka Debt trap, when in fact it is the Paris Club that is responsible. China has 10.3 % was clarified recently at a high-powered Indian Ocean meeting at Temple trees that Japan govt and ADB hold almost 25% of and Washington Consensus / Paris Club of donors hold most of the non-commercial loans.
    Also the dubious Tokyo base Nomura Ratings that acquired Lehman Bros. after it crashed started the run on the Lankan rupee with Fake News and wrong statistics of Lanka’s debt. should have been analyzed from political economy perspective.
    In fact, the Central Bank challenged Nomura figures and Nomura should be investigated in context of fact that there are a lot of external parties interested in Sri Lanka’s strategic assets, particularly, land and transport and energy infrastructure, particularly ports.
    Sri Lanka’s currency crash may be partly a self-Fulfilling Financial Crises triggered by external parties like Nomura and other Economic Hit men as detailed in Brad DeLong’s book explaining the role that psychology played in the economic disasters of the past decade.

  • 2
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    Dr. Wijewardena: failure to predict future trends and crises by practitioners of the dismal science is mainly due to a narrow research focus that exclude analysis of political dynamics, trends and power plays in economic affairs – or political economic and social-cultural analysis.
    In Sri Lanka this problem is made worse by a neocolonial and neoliberal mindset of many economists and policy makers who think that the West and Washington Consensus has a monopoly on truth, beauty and goodness re. economy. This sad situation is also due to global-local power and knowledge hierarchies, and lack of investment in Independent research and think tanks in Sri Lanka. Most Lankan research institutes are dependent on donor funds, and hence follow donors’ policy agendas. Also, brain drain of the best minds and lack of meritocracy and valuing of diversity in research and development think tanks is a reason and the ignorance of Ministers, and also is why there is policy failure even when institutions like IPS give good advice.

    • 0
      0

      ” Most Lankan research institutes are dependent on donor funds, and hence follow donors’ policy agendas. “

      Why China or Russia donate for those institution too? Pocket drying out paying $18B commission. How many of you are out out of Russian or Chinese Universities? For 70 years you all fooled yourselves by inventing rotten explanation only! You have no shame still to explain with your Pancha Maha Balawegaya explanation!

  • 5
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    “In more recent times, Chinese loans at market rates and investments have helped Sri Lanka to build its infrastructure facilities. These infrastructure facilities have been criticised on the ground that they are not economically and financially sustainable.”
    During the election campaign in 2015, China bashing became a prominent thing. Chinese funded projects were branded as ‘White Elephants’. PM told that he will stop Port City project. What a stupid statement from a veteran politician. Even the so called veteran politician JRJ dragged the country to a crisis by making a nasty remark against India. His nephew made a similar blunder by making nasty remarks against China probably to please those who funded the regime change. Country lost lot of money as a consequence of PM’s decision to stop Port City project. He should be charged for wasting tax payers’ money.
    Even some international experts have told that Hambantota harbor will be a gold mine for the country in future once Kra canal is dug in Thailand. But the idiots in this Government gave it to Chines for peanuts. Instead of exploring ways to make these projects profitable, this Government like to take the easy route and sell or lease (almost like selling) our assets to foreigners. What an incapable lot we have!

  • 2
    0

    Mr W.A Wijewaradan is better to seek new option Economic development, that high time to move from that old Neo-Liberalism has done irrapala damage to our development last 40 odd year by UNP -JRJ policies.
    RW of UNP leader of who is Lawyer nothing knew about that a simple knowledge of ABCD of capitalist Economy by himself. Most of political anarchist of TNA, JVP, ISIS and Tamil Diasporas link to some foreign forces which misled crisis different direction . Therefor UNP+SLFP coalition has no sense of that realized gravity of Economic we are facing. That is tragedy of crisis leads to economic catastrophes by UNP leadership?

    On the Other-hand crux of matter is UNP lost all thank -tanks in their top hardcore members in at the helm of top of governances body lack of policy implementation authorities …in the state tools.

    The sooner the better for developing Capitalism in Sri lanka….has to looking new avenues … .!
    While that ongoing New Crisis different from OLD -one occur in 2008 Wall Street collapses being appear in USA economy . Trading policies of US protecting against FREE TRADE has done damage to USED Value and EXCHANGE values of Global Economic growth undermined by US policies of Trumpism.

    Ours cannot depend on crisis of that solution pills given by that inside basket of IMF , WD & ADB funds and loans an advices for cannot revival of Ours national economic development?
    Lost of regain growth by lost of FDI, National saving and low Industrial production return of ours GDP….has no way increased our Foreign Reserves by promptly .
    Problem of economy growth and development is complex issues need to address by treat on that national priority basis.

  • 1
    0

    I appreciate the new IPS State of the Economy Report, through Dr Wijewardena’s review, although I have not seen it. It is good to hear that IPS keeps its independence following Dr Saman Kelegama’s footsteps. I appreciated Saman’s contributions very much, although not always sharing the same views. I was privileged to propose his name to the Director Board of the Colombo Stock Exchange in 2010, as I myself was a member at that time, and his contribution was immense. Two points may need further emphasis in respect of the IPS report.

    (1) Food security is something that the country should focus on given the climate change, current economic circumstances, or even otherwise. It is also related to poverty and class distinctions as well. During my last visit to Sri Lanka (July-August), I was appalled to see at Ratmalana, where I stayed, the way the middle class neighbourhoods waste food, while some poor people, probably beggars, searching for food items in the dustbins. If I am not mistaken, there is an influx of some poor people, particularly the old, from villages to cities in search of some way of living ending up as beggars, probably because of the crisis in the agricultural sector. When I talked to three persons, that is what they told me.

    (2) I am also pleased that the IPS report has focussed on the Belt and Road Initiative (BRI), to what extent and with what conclusions, I still don’t know. Although it is China’s initiative, in the future it can become a common endeavour. China has already indicated that opening. It is my view that Sri Lanka should become a partner country of BRI, like Pakistan, which I might explain in the coming days in detail.

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