1 March, 2024


Social Market Economy: Does It Provide A Solution For Sri Lanka?

By Sumanasiri Liyanage

Sumanasiri Liyanage

Sumanasiri Liyanage

I think it is for the first time that the idea of social market economy is introduced into the Sri Lankan election discourse. Champika Ranawaka appears to have borrowed the concept of social market economy (SME) from Dr. Harsha de Silva and used it as it was his invention for the purpose of portraying the economic policy framework of the future UNFGG government for the next five years. As far as I know, the concept of social market economy has never been discussed in serious manner in Sri Lanka. In the early 1990s, a seminar was held at the Colombo Hilton in which a German professor had outlined the concept SME as it had been practiced in Germany especially in the post World War 2 period. What is social market economy? What are the main characteristics of the SME? How does it differ from Anglo-American notion of market economy? What the exact role the state plays in the SME? These are the sort of issues I intend to address in this article.

A brief history would not be out of order in contextualizing the concept of SME. Although the concept was theoretically advanced in the 1930s, one may even suggest that some of the features of SME were put into practice during the Bismarck regime in Germany in the late 19th century. Bismarck introduced a universal social insurance scheme in response to the increasing popularity and influence of the social democratic party in Germany. The following description by Wikipedia gives a fairly correct account of the SME as it was later advanced by Müller-Armack in the 1930s:

Harsha Champika“Social market economies aim to combine free initiative and social progress on the basis of a competitive economy. The social market economy is opposed to laissez-faire policies and to socialist economic systems and combines private enterprise with regulation and state intervention to establish fair competition, maintaining a balance between a high rate of economic growth, low inflation, low levels of unemployment, good working conditions, social welfare, and public services.”

Wikipedia further explains: “The social market economy refrains from attempts to plan and guide production, the workforce, or sales, but it does support planned efforts to influence the economy through the organic means of a comprehensive economic policy coupled with flexible adaptation to market studies. Effectively combining monetary, credit, trade, tax, customs, investment, and social policies, as well as other measures, this type of economic policy creates an economy that serves the welfare and needs of the entire population, thereby fulfilling its ultimate goal.”

SLHence, we may note that it differs from Anglo-American laissez-faire policies that emphasize market as a equilibrating mechanism that would sooner or later generate social welfare as a by-product. Similarly, SME may be distinguished from social democracy and Soviet-type socialism, as it refuses to enter into the sphere of production as an agent of production. Müller-Armack conceived the social market economy as a regulatory policy idea aiming to combine free enterprise with a social program that is underpinned by market economic performance. Hence, it is a synthesis of seemingly conflicting objectives, namely economic freedom and social security.

The policies based on the SME were put into practice by the Cristian Democratic Union (CDU) government led by Chancellor Konrad Adenauer. West Germany was able to achieve a remarkable growth rate during the 1950s and 1960s when economy was steered by the Minister of Economics, Ludwig Erhard (if my memory is correct he later became the Chancellor). However, the amalgam of factors contributed for Germany to achieve high rate of growth. It received substantial impetus through US Marshall program. The victorious countries became magnanimous towards Germany following the advice given by J M Keynes. In Germany although the factors of production were destroyed relations, structures and culture of production remained basically intact. Under SME, social justice was achieved primarily through two processes, namely, (1) ensuring job security through government regulations making the termination of employment rather difficult; (2) using public money to finance housing, education and other social program. Therefore, the tax rate for highest bracket of individual income was kept at 95 percent. It applied only to income above the level of DM250,000 annually.

Of course, we may see, even Germany has been now moving away from SME because of the pressure from the process of globalization. In 2015, average tax rate in Germany exists between 44- 57 per cent. On the issue job security, although German situation is much better when compared with the USA, situation seems to be gradually changing. However, it is interesting to note that stronger job security in Germany has been accomplished by an unemployment insurance system that deters layoffs. On the other hand, In the U.S., the unemployment insurance system has encouraged layoffs while discouraging the use of work-sharing schemes.

German attitude towards SME may be seen clearly not in respect of its domestic economic policies but in respect to policies it has imposed on poor EU countries. Recently, Germany imposed heaviest neoliberal policy package on Greece. They Syriza, the left government in Greece, to reduce income tax rate and to cut down pensions, wages and social welfare expenditure.

So when the United National Front for Good Governance (UNFGG) promises that it will in power adopt SME policies, it seems that UNFGG is totally ignorant of the changing nature of capitalistic mode f production in the last 25 years or so. When capitalism moved from its late capitalist phase to neoliberalist phase, it means that capitalism has now moved away from high tax policies as well as security of employment policies.

The irony is when one read carefully UNFGG manifesto, it is in fact against SME for three reasons. First, it does not say anything about the job security and never offers an answer to growing phenomenon of manpower agencies that makes employment status undefined. What will it do in power to this issue? How is it going to tackle the issue of the growing casual and contract labor in relation to permanent employment in the private sector? The UNFGG manifesto as well UPFA are silent on this issues. This silence indicates that the both parties are planning to move to more flexible labor market.

Secondly, The UNFGG manifesto has proposed to take the EPF out of the Central Bank and gives it to so-called independent trust. What we have witnessed in the past 10 years is that many attempts were taken to rob the EPF, but fortunately all failed. EPF is the largest capital fund owned by the workers in Sri Lanka. Some time ago, Swedish economist, Meidner, suggested that moving towards socialism may be achieved by using this capital for social production and welfare. The UNFGG wants to rob the fund and give it to domestic and foreign capitalist class.

Thirdly, both manifestos promise many ‘goodies”. However, there are no acceptable and rational proposal as to how these goodies would be financed. In Sri Lanka, tax income is around 11 per cent. Is this tax revenue adequate to finance many programs included in manifestos?

SME and neoliberalism are gross incompatibilities. There is no way to link the first with the second. Those who propose that they would go for SME or social democratic policies today are either making a big mistake or trying to throw sands into the eyes of the Sri Lankan voters.

*The writer is the Dean, Faculty of Management and Finance, SANASA University. e-mail: sumane_l@yahoo.com

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Latest comments

  • 1

    Sumanasiri Liyanage –

    “I think it is for the first time that the idea of social market economy is introduced into the Sri Lankan election discourse. Champika Ranawaka appears to have borrowed the concept of social market economy (SME) from Dr. Harsha de Silva and used it as it was his invention for the purpose of portraying the economic policy framework of the future UNFGG government for the next five years. “

    Look at the Scandinavian Countries, Sweden, Norway and Denmark, and compare the metrics with other other developed and developing countries.

  • 2

    Is there any solid economic system that doe snot have draw backs and one will work for ever ?

  • 2

    If income tax rate is to be merely 11% in Sri Lanka (US average being about 30%), we can never dream of having a SME.

    There will be some kind of SME for the masses to produce and sell locally made trinkets and use the local rupee note away from that other rupee that the Elite use, that is pegged to the US $$$.

    The bulk of the countries improperly taxed profits is horded by the Elite and spent on foreign goods and services, while they indulge in laissez-faire with bigger items that emerged from the sweat-of- the-brow of the masses – the amount that(if) trickles back being given in great benevolence to the masses.

    If the tax rate for highest bracket of individual income was kept at 95 percent in Germany, then 95% is a good amount to tax the Lankan 1%.

    But as the two main parties will dare not do this, we need the JVP to put “mechanisms” in place to ensure a decent tax rate and ensure the right of social programs.

  • 0

    Borrowing money through Govt Bonds at 3 % more than the going rate must be a feature of Dr Harsha’s new Social Market Economy.

    But Harasha is not the enforcer … Right

    That is totally under the real Enforcer who is now talking about borrowing FX at 0.5 % from Koreans, and Japanese to replace Chinese debt.

    How cool.

    Wonder how much it costs to organize this Finance , because the investment bankers charge up to USD 5000 per hour even for their PAs.

    Then the commissions are around 2 to 3 % without any santhosams to Galleon or his Charities.

    This Social market must be bloody good.

    Can’t wait to see the break down of the rearranged Finance package of Galleo Ravi.

    May be CT will have to ask for it , because Batalanada Ranil wouldn’t allow even COPE to find out this time.

    • 2

      KASmaalam K.A Sumanasekera

      “Wonder how much it costs to organize this Finance ,”

      How much did it cost to arrange Chinese finances in terms of commissions and kickbacks, inflated pricing, arrangement fees, losses made in respect of good governance, money laundering,………… prime lands, …. diplomatic losses?

      According to my Elders, commissions ranged from 5 to 15%.

      Think about forgone welfare of the Dalits. As a malt whisky maniac you can not count yourself as one of them.

      As the elections near MR needs more b***s carriers.

  • 1

    I agree totally on a social market economy. China also had the right mix of freeing the market and regulation. They obtained FDI and a loyal population that had large scale savings.Technology transfer occured. They were able to make quality goods at the right price. Their labour cost wazs low. They had cheap raw amterials.
    In the west credit card and morgage mentality caused the crisis.Middle Esat and Japanand China leant to the USA. Miltirily they ensured that credit was availble to them which they eaqrned profits.
    It is here that all the world came back to the social econmy. The World Bank earlier made market intervention on behalf of the West. Commodities were given cheap credit to expand causing sulprles that kept prices down. Market penitration is very difficult into the developed world. Least developed country are given GSP+ benifits to foster competition and sulprles.
    We have to develop are technology base. Productivity has to be improved. labor laws and land availability and power, ports, airports and roads will be avialable to us. This can generate returns. Tax comliance of rich can tale place only useing new bank and fund movement tracing. Ethics si a consideration. Our people should own m,ore but with their needs satisfied must save to enable large domestic savings. National pride can help us in this regard as countries that developed.
    We know that the President is in favour of development of Agriculture and Industry to replace imports. As He is in favour of a social market economy Harsh and Ranawaka can have support i8n this venture. As RW wants all to get together the only answer is a Social market #conmy.

  • 0

    Economists are not professionals. They have no code of conduct and therefore they cannot be punished if the models fail. I will start believing them if they can forecast scenarios for a longer periods and recommend 10-year Master Plans for national development.

    • 0

      I agree, long term planning and policy stability is essential.

      See this UNDP document which I think points in the right direction:

      “Rather than making predictions based on extrapolation of
      current trends or frequency of similar past events, foresight
      cultivates the capacity to anticipate alternative futures and
      an ability to visualise multiple possible outcomes and their
      consequences. Strategic foresight helps policymakers improve
      the effectiveness of governments by identifying opportunities
      and threats that may arise over the coming years and decades,
      as well as possible strategies to deal with them. “


  • 0

    “Is it the solution for Sri Lanka?” what is the problem to be solved? Is it growth or income equality? The two main parties seem to represent different priorities.

    Country size and population is important when comparing economic systems, this is usually left out of the comparison. Norway and Singapore have populations less than 5 million, I think it would be most meaningful to compare countries with similar size and population densities.

  • 1

    At least the UNFGG has come up with a conceptual framework for their proposed five year plan. This is better than Madamulana economics. While the discourse of ‘social market economy’ has a strong German origin, it is not German. It is to discredit the concept, I think, Sumanasiri has traced the roots to Bismarck and linked it to Christian Democracy. Social market economy has a strong social democratic strand and can be taken as a doctrine of its own. In the case of Sri Lanka, in the interim, it could be developed in order to ensure both ‘economic freedom and social security.’ There can be a Sri Lanka’s version of Social Market Economy in practice. Why not?

    What might be relevant to Sri Lanka is not what appears in Wikipedia as a definition or description. What Rudiger Dornbusch explained in 1993 in his “Stabilization, Debt and Reform: Policy Analysis for Developing Countries” is more relevant. Let me quote four main points that he highlighted.

    “The right to own property is acknowledged by the culture and protected by a well-functioning system.

    Competition – both within and across borders – is accepted as the basic rule in markets. Competition is enforced by allowing entry into all and any market, by vigorously opposing monopolization, and by opening the economy to world trade. Competition makes the most resources.

    Equity is a distinct social objective and need not emerge from the operation of competitive markets. The government promotes equity through a tax system that strikes a balance between equity and efficiency, and above all, by investing in education and health, which are key determinants of economic advance.

    Government action needs to be bound by institutions so that there is less need for individuals to assume a defensive posture against possible government action.”

    While all above four points are important, let me emphasize the paragraph 3 which emphasizes on ‘investing in education and health.’ Isn’t this an important plank of the UNFGG five year plan? Social Market Economy should not be the framework for Sri Lanka forever. At least it would supply a relevant framework and discussion point for the next five years.

    • 1

      Dr Laksiri Fernando

      The two main parties are different in their economic philosophies, so labels aside, they will most probably act more in line with their own capitalist or socialist leaning agendas.

      Why the reference to ‘right to own property’. In socialist countries people own property, it becomes a problem when the right to own any amount of property is at the expense of the poor.

      Interesting quote: the reference to ‘Equity’:

      “Equity is a distinct social objective and need not emerge from the operation of competitive markets. The government promotes equity through a tax system that strikes a balance between equity and efficiency, and above all, by investing in education and health, which are key determinants of economic advance”

      Equity, or income equality, indeed a social objective, but are both the parties equally interested in increasing income equality?

      What is more telling is that the government is supposed to ‘strike a balance’ beteween equity and efficiency, implying there is a trade off. What would like be the trade of of the UPFA versus the UNFGG?

      “Investing in Education and Health” – to what extent? Which party is likely to invest more? At what point do these become ‘hand-outs, and what would be the best for majority the country?

      • 0


        What is at issue is not a selection between two parties with ‘socialist’ or ‘capitalist’ agendas. That is an old way of thinking. Not that I am discarding the objective of socialism. But we are not yet at that stage. Selection is between an ‘old regime’ and a ‘new one.’ It is about a necessary socio-political transition for the sake of democracy and development. It is not a selection between two sides. It is a selection between two stages. Within the SLFP/UPFA itself, there was/is a rupture. Why? Because there had been a degeneration/distortion of even traditional SLFP/UPFA policies under Rajapaksas.

        I might call the Rajapaksa economic practice (2010-2014) as ‘political market economy.’ It was different even to a state controlled market economy of the old SLFP/UF (1970-1977). Under the state control, there were at least procedures and regulations. The ‘political market’ was handled on the whims and fancies of politicians, not the state bureaucracy.

        In contrast, what is enunciated as ‘social market economy’ is a major step forward. Don’t depend too much on the quote I referred to. However, it is indicative of the general thinking of the concept. It is undoubtedly a dual formula. Some say, ‘freedom and responsibility’ and some others say ‘equity and efficiency.’ I have seen Harsha De Silva saying it is a balance between ‘economic liberalism’ and ‘political liberalism.’ Ven. Sobitha emphasises ‘equity’ side as ‘social justice.’ But I prefer a balance between ‘liberalism’ and ‘socialism,’ if at all possible or eventually.

        Striking a balance between any two sides is not easy. As you say, it can be a trade-off as well. However, it is not a trade-off between UNF and UPFA. A ‘national government’ could bring a better balance than a ‘one party’ or ‘one-coalition’ government. It is on that premise that the SME is viable. Maithri/CBK wing of the SLFP/UPFA could bring the ‘equity’ side strongly if you want to visualize the formula in party terms. Rajapaksa is strongly against a ‘national government.’ He and his associates want their ‘political market’ back. It is not by accident that Welgama opposed SLFP joining the January government when President proposed. He is one of the most benefitted persons (on record) from the ‘political market economy.’

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