20 May, 2022

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Open Economic Policies Are Not At Fault, The Socialist Thinking Is – A Critique Of Muluratama Harimagata

By Harsha Gunasena

Harsha Gunasena

The eleven constituent parties of the government which plans to move away from the government ranks released their policy statement, Muluratama Harimagata, recently.

They identify the present economic crisis by way of scarcity of foreign exchange for the imports, drop of the government revenue, collapse of the domestic system of food production, collapse of domestic industries and as a result of this situation the possibility of creating a political turmoil in the country by the enemies of the country.

Open economy is identified as follows in their statement.

“We should accept that we cannot find out the solutions to this crisis without acknowledging the fact that regressive reforms introduced after 1977 in the name of open economy has pushed the nation to this crisis. That economic model based on foreign loans and focused on urban constructions and trade has endangered the economic security of the country and living standard of the low income strata while totally disintegrating production system of the country. Within that economic model disparity of income distribution of the country widened and in the short run some deceiving superficial decorations were visible. It is important to understand that we are experiencing a grave depression of this so-called development model.” (translation was by the writer)

This is a wrong interpretation. The closed economy prevailed prior to 1977 was rejected by the people. The current situation is also a closed environment. Many countries followed the open economic policies for their development. For instance Vietnam records exports of 106% of GDP and imports of 103% of GDP. This is an economy focused on trade.

The origin of the present economic problem was during the previous Mahinda Rajapaksa regime to which all of these parties have contributed. An attractive economic growth was achieved mainly based on construction supported by the loans on high interest rates. Costs of these projects were high and as usual hands of the authorities were greased. Considerable portion of these constructions have not given adequate returns compared to the capital invested. Under this type of circumstances any business would face bankruptcy. Therefore the growth rate was deceitful in substance. Growth rate of a country like us should be based on exports. Exporters got step motherly treatment during that period. Economic pandits of that government (present Governor of Central Bank was one of them) did not pay any attention to exports. In 2004 exports to GDP was 35% and it was dropped to 21% in 2014. This is explained in the graph.

Export to GDP – Sri Lanka
(source :https://data.worldbank.org/)

In addition to that considering the government finance tax revenue of the government to GDP was going down for a long time. This is explained in the graph.

Tax Revenue to GDP – Sri Lanka
(source :https://data.worldbank.org/)

The government came into power in 2015 introduced a new act of taxation to address this issue. Results of that is also in the graph. When this government came to power in 2019 these taxes were withdrawn and the government lost the tax revenue and the tax base to a great extent. This was the immediate reason for the current economic situation. Economists warned the government at that time and their advice was not heeded by the government and these eleven constituent parties of the government.

They cannot argue that the cause of the present economic crisis was the open economic policies adopted by the successive governments. There are enough examples that the countries with closed economies achieving higher growth rates after adopting open economic policies.

This statement does not deal with the high expenditure side of the government which causes budget deficits which is one of the causes of the current economic crisis. Successive governments over a period had high budget deficits. One of the main reasons for high government expenditure is inefficient government service. There is no way forward for the country without restructuring the government service.

The governments run the state owned business entities in inefficient manner which has contributed to the problem. These are maintained in order to provide employment opportunities for the cronies of the governments and to maintain the power of the politicians who are responsible for those entities. Trade unions of those entities also behave solely based on their self interest. These institutes should be privatized based on a regulated manner or converted to government-private enterprises. In the past privatization also was done to help the cronies of the governments. Country cannot maintain large number of passengers over a long period.

If the open economy was implemented properly this type of unproductiveness would not last in the economy. Therefore the question is not the open economy but whether we can implement it in the correct way.

It is true the comment in this statement that the living standard of the lower strata of the society is going down. The disparity of the income distribution of the country was widened over the years. This can be remedied to some extent by increasing the direct taxes and reducing the indirect taxes as suggested in the statement. Thereby the benefits of economic growth can be taken to the masses.

Subsidies are provided to the needy persons as well as to the affluent persons. State bear unnecessary costs in this respect.

It is recommended that not to bank solely on the foreign investors but the concessions should be given to local investors as well. It is good. It should be noted that one of the reasons that the country does not attract foreign investors is that the politicians and the bureaucracy are prepared to exploit them. There should be a methodology to eliminate this. The investors do not want to come to a country which does not have the authority of the law.

Education reforms should be done in order to facilitate the employment opportunities in the high tech industries. the current closed education model should be opened. The political block which represent the politicians who made these proposals is not allowing this to be done.

This statement proposed that the banking system should pay an attractive additional price in competition with the black market to purchase the foreign currencies of expatriate workers in order to increase the quantum of remittances.

Therefore it is their intention to continue the price control of the foreign exchange market. The Central Bank deviated from its policy on 7th March 2022 and increased the exchange rate for USD to Rs.230. on the following day it went up to Rs.260. This is happening since this price control cannot be maintained. It is the same imposing price controls on sugar as well as on foreign exchange.

It is proposed to abolish the recent import tariff concessions to the importers of sugar, coconut oil, wheat flour, milk powder etc. and introduce price formulas and thereby make justice to the consumers and local producers. New import tariff structure will be introduced.

This is combining price control with import substitution. Import substitution can be used for a short period in order to come out from the current impasse. It would not be beneficial in the long run since the cover of the government could be used to produce low quality goods and continue to be inefficient such as the government institutions. We have experienced this during 1970-1977 period.

The best is export promotion since the whole world can be the market for exports whereas only Sri Lanka could be the market for import substitution.

It was suggested that to impose a minimum price for the purchase of paddy to make paddy farming an attractive economic activity. These are very old suggestions and there is no novelty of these. Wet zone paddy farming is not profitable like dry zone. The productivity of the agriculture sector in Sri Lanka is very low. In order to improve it the farmers should be directed to cultivate commercial crops. By imposing a minimum price the consumers are forced to pay for their inefficiencies.

Sri Lanka faced this situation due to the lack of financial control of the country. The writer is engaged in a project of developing the financial literacy and business acumen of the small and medium size enterprises (SMEs) of Sri Lanka with the help of Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka). Although CA Sri Lanka which is the authority of establishing accounting and auditing standards of the country, has introduced two sets of standards one for SMES and the other for Micro Level entities in addition to its common standard, it is the experience of the writer that most of these SMEs do not prepare basic financial statements at least for them to know the status of their businesses, let alone following those accounting standards. This is a hindrance for them to develop.

Gross Domestic Product (GDP) of Sri Lanka is USD 80 Billion. Turnover of Walmart is USD 560 Billion. Turnover of HSBC Holdings which is ranked 102 in the index and which is having a branch in Sri Lanka is also USD 80 Billion. GDP of USA is around USD 20 Trillion and Sri Lanka’s rank is around 70 among the other countries. Therefore Sri Lanka is a SME among the world economies. The country inherits the financial discipline of its SMEs.

This particular financial discipline or lack of financial discipline is promoted by the old left in this country. This statement issued by eleven constituent parties should be understood in that spirit. World has shed this ideology and we are still struggling with it. Most of these suggestions are outdated. At this critical juncture of the history of the country political parties should be able to come out with radical proposals. There is no such vision to these political leaders. Unless they change their policies they are in the process of moving to the political dustbin of the history.

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Latest comments

  • 11
    2

    There is no socialist thinking in this country. Socialist thinking was dead and gone well before independence and it was replaced with racial thinking and introduction of religious fundamentalism. In fact the country had an opportunity to build up this country in 2009 but it fall into the greedy Rajapaksa family hands and that is the end of Sri Lanka. The fundamental for economic success is free from corruption and peace among communities both were perished by Rajapaksa family.

    • 2
      0

      This comment was removed by a moderator because it didn’t abide by our Comment policy.

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    • 2
      0

      This comment was removed by a moderator because it didn’t abide by our Comment policy.

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    • 5
      2

      These idiots are still stuck in a Paradise which never existed, rather like our “glorious ancient past”. They talk about “self-sufficiency “, but those who lived through the closed economy know it was a mirage. There was never enough to go round, which was why rationing was retained for all sorts of things from rice to parippu. Even cloth was rationed. Rice continued to be imported.
      Those who call for de-linking from the global economy need their heads examined. They only need to check the plight of even mighty Russia, floundering after being expelled from global networks .

      • 2
        0

        OC , Lanka will soon be delinked from international currency markets and declared a bankrupt nation.

    • 0
      0

      “Socialist thinking was dead and gone well before independence “
      Many more Sinhalese opposed the Citizenship act than Tamils, some of whom supported it.
      I have read “Where do correct ideas come from” but I have yet to find one on where stupid ideas come from.
      Any clues?

  • 1
    4

    The systematic faults combined with incompetence has contributed to the prevailing economic woes. Although not nearly as significant as one other varaiable that is hardly discussed. As soon as its mentioned many go into some kind of coma! Although you need to wake to this reality. Sri Lanka has been at war with the UK since 1948. The UK govt is using proxies and probably other economic measures to destabalise the island. [Edited out]

    • 3
      0

      Jambu,
      “Sri Lanka has been at war with the UK since 1948.”
      You are such a genius, Jambu! I could never understand why our Army is 3 times the size of the British Army.
      Thank you so much for educating me. Was it something about the Buddha that got edited out?

      • 0
        0

        OC
        You should take the matter up with CT for editing out much of a gem mine.

    • 2
      0

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  • 9
    1

    What amazes me most is that in Sri Lanka it’s the crooks who want to turn the country ‘hari magata”. Weeerawansa who stole money owns numerous identity cards and passports not only in his name but also in his wife’s name and Gamepilla who forged signatures and sold someone else’s shares are today joining Maithripala who facilitated illegal 52 days government violating the constitution are the leaders in this group with a spent force politician Vasu. These are the rats who are now jumping off a sinking ship. No voter should vote for them. The law of the land should take action against all these crooks on pending cases against them in the courts of law.

    • 0
      0

      Buddhist you said it Bro. When we have crooks and criminals ruling for almost two decades why blame the system.The same old excuses, denials, ignorance, blame game, racist mind sets … and yet expecting different results. Do any one really believe in change????

  • 8
    1

    Is Wimal Buruwanse born yesterday? Also prior to 2015 BASIL was an American citizen. Wimal and Gonthadipila behave they just woke up from a dream. Just imagine if these sons of bitches with that Vasidewa were washed away by Tsunami in 2004/ would Medamulana dogs would ever be able to mislead the Thanakola eaters on and on?😎🐕🐃😎🐕🐃😎🐕🐃

  • 2
    2

    All kinds of formulas have been implemented for the Lankan open economy since 1977, including the recent one where when all failed, the Oligarchic model of Lankan super-brain magic was implemented as the final jab. Hasn’t worked of course. No, we have to start from the basics like what Vietnam did, where the Communist system was run for several decades to invigorate the national development spirit, before the open economy was gradually introduced.

    • 2
      2

      ramona therese Fernando,
      “…before the open economy was gradually introduced.”
      —-
      The success or failure of the open economic policy introduced under the Structural Adjustment Program of IMF depended on the approach followed to open the economy. Some countries adopted ‘Big Bang’ approach prescribed by IMF e.g. Russia and got into a mess. Other countries such as China, Vietnam adopted ‘Gradualist’ approach to open their economies providing certain amount of protection to domestic industries to get adjusted to the competition in the world market.
      Sri Lanka probably did not have a choice other than to open the economy like opening flood gates flooding the market with foreign products wiping out almost all the industries and agricultural produce that emerged during the period country had closed economy. Although the world market was open to Sri Lanka, there was nothing much this country could export to earn foreign currency to import manufactured goods as well as agricultural produce from other countries. So, the Government started to borrow and export maids to Middle East to earn foreign currency to pay for imports. After that, buying and selling became the name of the game instead of production. Sri Lanka also got into a mess because of the approach followed to open the economy by JRJ’s Government.

      • 0
        0

        EE,
        Yes, correct, except that Sri Lanka had a choice implement the open economy gradually. They could have negotiated it.

      • 2
        1

        Eagle,
        “So, the Government started to borrow and export maids to Middle East to earn foreign currency to pay for imports.”
        So, where were these maids borrowed from?

  • 2
    0

    This comment was removed by a moderator because it didn’t abide by our Comment policy.

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  • 4
    0

    Bangladesh is lot better structures than SL it seems. How we handled the Emirates when UL started to making profits. (Chased away by losing popularity king)
    What happend to the promised VW plant though.

  • 1
    0

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  • 0
    1

    “If the open economy was implemented properly this type of unproductiveness would not last in the economy. Therefore the question is not the open economy but whether we can implement it in the correct way”. Open economy has many meanings in the Sri Lankan context. But at the core is that the economy(and society) have been opened for foreign capital, industries, businesses and more. Global,mainly European, American (and later Chinese and Indian) corporations have been making inroads in the domestic economy e.g. private education and retail sectors. Expansion of KFC and McDonalds. During the British colonial period, Lankans were taught to eat and drink, consumer products made in England and its colonies such as HongKong, Singapore. Now the practice has expanded to the exgent of decimating domestic agriculture, business,industry(if any?) or production and exxhange. To implement open economy correctly means inviting foreign capital, companies etc do do more while exploiting Lankan labour force, consumers and students. Author is wrong to say that the open economy can be implemented correctly. Developed countries need developing countries to exploit resources including human resources for expanding their comopanies and for the governments to be able to increase tax revenue. This is the truth about global economy.

  • 7
    0

    Our woes are not economic …….. but of incompetence.

    The Rajapakses, although excellent accomplished swindlers ……… are lousy at managing the economy: they haven’t a goddamn clue!

    Appoint unqualified/unsuitable me, for my pristine “Sinhala-Buddhist” credentials, as the chief neurosurgeon in the Colombo Hospital …….. I’ll show you what incompetence is ………… not second to The Three Stooges: Mahinda, Gota & Basil

    Without a script ……. we should just film them in daily action ………. market them as foreign-comedies to Netflix: a sure money spinner!

    Dollars galore …… all problems solved.

    Time to think outside the box.

    • 3
      0

      Nimal, not a bad idea. Imagine a virtual tragicomedy show “yes sir failure”” telecast worldwide, of Rajapaksas trying to run the country.Even the backup cast Wimal, Goman, Vasu, Mahindananda, Pavithra, Ganacca, Dr. Pani, Rambo Rambuk, Pissu Sira, RW, Cabraaaal, GLP ……….., OMG, sure money spinner.

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