By Hema Senanayake –
Presidential election is over. New president and his Cabinet have already assumed duties. Now it is the time to begin the Path of Erudite. I like this word “erudite” which simply means “intellectually superb.” I prefer, if the total governance is going to be intellectually superb with high priority for the economic governance.
Interestingly, president has appointed a veteran economist who is a former Treasury Secretary, as the Secretary to the President. I guess this is the first time that a senior economist heads the Presidential Secretariat in Sri Lanka. That appointment itself reveals the ambitious mind of the president. Economy will be his top priority and now a veteran economist will be with him always. Also, he might have thought that a former Treasury Secretary would easily handle the regular administrative work in the presidential secretariat. Such thinking may have some merit.
Economy must be pain in the neck for new president. Economy is really bad. Appropriate actions must be taken as early as possible. Such statements are being made by economists, non-economist columnists, politicians and possibly by those who championed the Viyathmaga. But what are the so-called appropriate actions? This is the important question.
Therefore, if I do not discuss at least a few such actions, I might be wasting your time and my time in writing this essay. The first appropriate action is to understand the economy as a system specially by the people in Viyathmaga, because the President can easily ignore your voice and mine, but it might be not that easy to ignore the opinions of Viyathmaga. That is why they must understand how the economy works.
Economy is a system. Understanding of it is very important. The word “system” has been defined by the Business Directory as follows; “an organized, purposeful structure that consists of interrelated and interdependent elements such as components, entities, factors, members, parts etc. These elements continually influence one another directly or indirectly to maintain their activity and the existence of the system, in order to achieve the goal of the system.” Further there is one important feature in all systems. That is, “systems” display properties that are not possessed by any individual elements, called emergent properties. There is a common example to clarify this point. For example, salt (Sodium Chloride) is a system. The element Sodium (Na) is not salty and so is Chloride (Cl) but when both combined to form Sodium Chloride (NaCl) it taste salty, a new property that is not possessed by any individual element.
The macroeconomic system too has properties that are not possessed by any individual economic agent. For example, households, non-financial businesses and government are essential elements (sectors) in the macro system. Individually, each sector can be free from over-indebtedness, but the nature of the macroeconomic system is that all three sectors can never be free from over-indebtedness when the economy reaches to its maturity. Almost all developed countries, including Japan and Singapore are good examples for this observation. How this understanding applicable in planning Sri Lanka’s economic development? My conclusion is that, if Sri Lanka’s non-financial business sector cannot sustain significant growth while taking care of the nation’s current account, our hopes for economic development will be in jeopardy. It also means, that if the targeted GDP growth is mainly coming from increased government expenditure, then again, we will fail.
Knowingly or unknowingly, it was the JVP which presented the above conclusion most effectively during the past election campaign rather than two main candidates. Anura Kumara Dissanayake said that they would create “mass craving for entrepreneurship (Viyawasayakathwa Unmadayak)”. JVP is a leftwing party that had been critical about capitalists or entrepreneurs, previously. Perhaps they might have come to the realization that total national proceeds (sum of all sales) are originating from enterprises and the distribution of distributable output is not essentially linked to the ownership of the means of production in all modern states, even though inequality prevails. I hail JVP for this newly found wisdom.
The expansion of national proceeds while taking control of the current account is so important because, it is from this total proceeds that greater part of consumption and capital allocation in the economy arises. Increased proceeds mean, increased investment and increased consumption by households and by the government producing common interests for the society. This goal cannot be simply achieved just by reducing business taxes. This can only be achieved by promoting an entrepreneurial class in the country. This is not a choice or wish of any political party instead it is an economic necessity.
The said entrepreneurial class must have its own obligations to the economy and the society at large. In turn, the system should make entrepreneurs profitable. However, entrepreneurs would make a loss, for an example, if they invest in producing products for immediate consumption. Also, they would make a loss if consumable allocation of which part is tax are not paid to employees and the government. This is why a highly advanced entrepreneurial class is essential for the country. Entrepreneurs should understand as to how the economy works while making profits. This knowledge does not come automatic, as such the government has a role to play.
The government cannot play the said role, if the government bureaucracy is not aware as to how the economy works. I have a personal experience on their lack of knowledge. A few years ago, when I worked for a certain ministry, the secretary to the Ministry wanted to distribute seed packets for recipient families of Samurdhi (welfare payment to low income families). He wanted to justify the expenditure incurred on seed packets (as I remember one packet cost only Rs. 50/=). So, he asked us to calculate the yield of the produce after planting seeds and multiply it by the prevailing market price even though the output is supposed to consume by householders. As I remember, total cost for seed packets came to be around one million Rupees and the value of the output was about 27 billion rupees. Then he argued that the contribution to the GDP is about 27 billion. When I tried to explain him that unsold produce is not accounted in GDP, he did not agree. That was the level of ignorance of our bureaucracy. This is why the government bureaucracy should understand as to how the economy works, then they will assess their decisions at least in terms of the impact to the national current account. If such assessment had been done, Akila Viraj Kariyawasam might not have decided to distribute I-pads to all advanced level students. Instead he would promote to have a highly effective “instructional design” for classrooms.
Also, there is big myth in the circles of governance, especially in the Treasury and the central bank, that the economy could be managed with the advices of IMF. Also, politicians when elected to the government believe in this myth. In the last year one prominent minister told that the IMF had insisted to have a primary surplus (which means revenue is sufficient to pay govt. expenditure and loan principles without interest) in the government revenue and they achieved that target and so the economy would move well. Nonsense.
By 2013, India too had the same conviction about IMF. They went one step forward than us. Instead of taking advices from IMF teams visiting to the country regularly, India hired a former Chief Economist of IMF and put him as the governor of the Indian central bank (RBI) by September in the same year. Usually this was a post for 8 years but exactly after 3 years, the post was re-advertised. Former IMF economist left exactly after three years. India got rid of that Myth after that experiment. Economic reforms for any country are not simple. Especially, it is difficult, if all stakeholders do not understand the workings of the economy. Primary surplus mean nothing, if other reforms are not undertaken and sometimes having primary surplus mechanically might defeat the very goal, it wants to achieve.
In general, the whole economy needs to be restructured or reformed. It is not a long path or not needed to tighten your belts. But it needs wisdom not arrogance. I can cite many examples. That is why I said that the Path to Erudite should begin now.