Colombo Telegraph

Social Market Economy Or Political Manipulation Of Market?

By Laksiri Fernando

Dr. Laksiri Fernando

It is always better if political parties explain to the people on what basis that they plan to manage the economy if they come into power. If they don’t, then it is up to the people to uncover their policy frameworks. This can be done on the basis of analysing their manifestos or past practices. Of course there can be a difference between what they say and what they actually (intend to) do.

United National Front for Good Governance (UNFGG) has come up with the concept of ‘social market economy’ (SME) quite commendably as its policy framework for its proposed Five Year Plan. There is no such a pronouncement from the United People’s Freedom Alliance (UPFA). The recent interview of Mahinda Rajapaksa at ‘Rata Saha Heta’ (country and future, 5 August 2015) on Hiru TV was a mumble on the subject. In the past (2005 and 2010), it was a personalized thinking of Mahinda Rajapaksa called ‘Mahinda Chinthana.’ It didn’t mean much as a policy framework apart from a personal determination to control or intervene in the economy.

However, going by the practice of the Rajapaksa regime, particularly between 2009 and 2014, it could be named as the ‘political market economy’ or more correctly ‘political manipulation of market’ (PMM). This was the case whether it was the stock market, mega projects, other government contracts, bond market or even export-import trade. What actually was the practice before (2005-2009) is a difficult question to answer as the situation was blurred by the war situation. What was clear nevertheless was the political manipulation of arms trade or deals. Some of the tendencies even preceded the Rajapaksa era.

Policy Evolution

At independence in 1948, Sri Lanka inherited primarily a ‘liberal market’ policy from colonial masters both internally and in respect of import-export trade, accompanied by some commendable welfare measures. As the framework was not sufficient for development or equity, ‘mixed economic policies’ became promoted since 1956 (i.e. Ten Year Plan) with reversals back to liberal policies during certain periods (i.e. 1965-70). What it meant was a dual-economy of the State and the private sector.

The country opted for ‘radical state interventions’ and rather a ‘closed economy’ during 1970-1977, accompanied by import substitution industries and nationalizations. Subsequently, a reversal to an ‘open economy’ was somewhat inevitable in 1977 given both domestic and international conditions. On the international front, first it was the ‘new international division of labour’ (NIDL) and then the ‘globalization.’ Although there was an effort to give a ‘human face’ to the ‘open economy’ after 1994, the inevitable reality was the continuation of purely liberal market policies until well into 2005 or even thereafter.

All these could be considered experiments or different stages of development. Then came the strange animal, the Rajapaksa economy.

Rajapaksa ‘Economy’

It is extremely difficult to visualize a personalised thinking like ‘Mahinda Chinthana’ as a policy framework for any democratic or decent country. Exceptions of course are, Mao Tse-tung’s China or Kim Il-sung’s Korea. Although the ‘Mahinda Chinthana’ name tag is now unceremoniously dropped, the thrust is the same. It is undoubtedly a peculiar social, political or class phenomenon. It is not the traditional ‘national bourgeoisie’ that the Marxists talked about. But some salient features were abundantly there in a corrupt manner. It is definitely not the ‘pancha maha balavegaya’ (five great forces) of the traditional SLFP, except for vote gathering.

It was a parasitic elite or class, greedy of wealth and power. Either they themselves were politicians or their cohorts. The emergence of this parasitic class was possible primarily under two conditions: (1) civil war and military conditions and (2) connections with certain sections of the new business elite/classes in China. When considered within the policy frameworks of post-independence Sri Lanka, Rajapaksa economic policy (PMM) was an aberration, with certain traits from state interventionism of past SLFP regimes.

It was however different to traditional state interventions. It was not the ‘institutional state’ or the legitimate bureaucracy that intervened in the market, but the politicians or political elite. The motive of course was profit or wealth. During this period, business rules and regulations were bended in many economic deals; and institutional frameworks were dismantled or brought under political control (BOI, CES, SEC etc.). In certain respects, the usurpation was reminiscent of feudal acquisition of wealth.

It is on the above basis that the Rajapaksa policy framework could be named as PMM. The political class that benefitted from this PMM also had a particular ethnic bias. It was by and large ‘Sinhala only.’

Rationale for ‘Social Market Economy’

Qualified market economies are undoubtedly important for growth and development under the prevailing circumstances in Sri Lanka and internationally. Even this is accepted by the ‘communist’ China today. To accelerate growth and development, competitive markets are important, both internally and externally. For Sri Lanka to ‘take off’ in a real sense, it should have a growth rate beyond 10 percent with social development. Or at least, that should be the target. Rajapaksa period achieved some growth due to favourable external conditions i.e. Asian resurgence etc. However, it was not only minimal but also overestimated due to unrevised measurements. For a proper growth and social development, political manipulation of market mechanisms should end. This is true even on the labour market.

It is also obvious and well accepted that pure market mechanisms or development do not ensure social equity or broader social justice. There should be parallel measures going beyond traditional liberal welfare-ism. This is particularly relevant in a plural developing country like Sri Lanka where ethnic frictions prevail. There is an economic underbelly in the ethnic conflict. As we have seen from the Rajapaksa experience, even ‘development’ per se would not bring social harmony or ethnic reconciliation. Equitable social policies are important cutting across the ethnic/religious divide.

UNFGG has come up with a policy framework of ‘social market economy’ whatever the attendant or other weaknesses. It was the framework that Germany employed for post-war reconstruction period. The common post-war scenarios between the two countries could be coincidental. There are other theoretical validations for the concept although in recent times some economists have become somewhat oblivious on the subject. Anthony Nicholls used the title “Freedom with Responsibility” (1994) in tracing the concept in the German context. It should however go beyond ‘responsibility,’ towards broader social justice.

Basic Tenets

In understanding the basic tenets of the concept, what might be useful is the following quote from Rudiger Dornbusch in his “Stabilization, Debt and Reform: Policy Analysis for Developing Countries” (Prentice Hall, 1993).

“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.”

Of course a social market economy is capitalist. That is why the right to own property is accepted and protected. Sri Lanka is hardly in a position to move beyond capitalism in some form at this stage. In respect of the market, on the premise that ‘competition makes the most resources,’ competition is not only allowed but promoted.

Most important is the principle or conception on equity. Social market advocates believe ‘equity as a distinct social objective.’ It does not need to emerge from the operation of competitive markets. Of course it doesn’t. What it tries to do is to ‘promote equity through a tax system that strikes a balance between equity and efficiency.’ It is by doing so, that it intends to invest in education and health.

If we make a slight diversion from the main discussion, it is interesting note the utter failure of the Rajapaksa regime to sustain a viable tax system. Even the proposed tax reforms were not implemented. No need to say that their investments in education or health were most pathetic. That is how the university teachers’ demand for 6% GDP investment in education emerged.

In understanding the UNFGG program or way of thinking, the last paragraph of the quote is also important. As it says, ‘government action needs to be bound by institutions.’ That was not the case during the past regime. The result was not only that people had to ‘assume a defensive posture against government action,’ but it was repressive. The situation was extremely repressive in the case of minority communities or rights advocates. It could have been the same case of some investors, entrepreneurs or business personnel. The situation was not merely a case of corruption.

What I wish to show is that in moving away from a ‘politically manipulated market,’ the proposed ‘social market economy’ has a major relevance for both social justice and good governance. Both aspects also could be improved further.

A Sri Lankan Variety?

What we have at present in Sri Lanka is a basic sketch of a ‘social market economy.’ Dr Harsha de Silva in assuming duties as the Deputy Minister for Policy Planning and Economic Affairs emphasised the concept in January. Thereafter, the idea has gone into the drafting of the UNFGG election manifesto also called a framework for a future five year plan. As Ceylon Today reported, (24 July 2015) speaking at the inauguration of that Manifesto, Ranil Wickremesinghe has said “the UNFGG Government will create a social market economy where the social security of the people and environment is protected while encouraging competition.” Therefore, the ‘social security’ and ‘environment protection’ are the main principles that RW has emphasized, on the social side, while ‘encouragement of competition’ undoubtedly would take a major boost on the market side.

What Ven. Madualuwawe Sobitha said at the same meeting is also important. “It is time that people rally behind an idea instead of sticking to a political party” he has said. He also added saying “Since independence up to now what we did was voting one political party out and voting another in. Now people want a change, they should support a vision.”

If there had been some academic focus on these issues in recent times, to my knowledge, it was in the Professor Buddhadasa Hewavitharana Felicitation Volume on “Economic and Social development under a Market Economy Regime in Sri Lanka” (2011). Particularly, N. Balakrishnan has focused on ‘efficiency and equity issues’ although in a limited sector of secondary and tertiary education. There are also others who have discussed the problems associated with ‘efficiency and equity’ but stopping short of proposing something like a ‘social market economy.’

‘Social market’ concept undoubtedly is a dual formula. Some say, ‘freedom and responsibility’ and others ‘equity and efficiency.’ I have also seen Harsha de Silva saying it is a balance between ‘economic liberalism’ and ‘political liberalism’ which might not be totally correct. Ven. Sobitha or his movement (NMSJ) along with other civil society organizations have emphasised the ‘social’ side as ‘social justice.’ I or any other might prefer a balance between ‘liberalism’ and ‘socialism,’ if at all possible or eventually.

Striking a balance between any two sides or concepts is not an easy task especially in managing an economy. As some have pointed out, it could lead to a ‘trade-off’ undermining one or the other. Traditionally, there had been two main tendencies in socio-economic thinking in Sri Lanka or elsewhere: (1) those who emphasise the market or efficiency side and (2) those who promote equity and social side. According to some that was the traditional difference between the UNP and the UPFA. However, this has dramatically changed, primarily because of the interregnum of the Rajapaksa regime, and its political manipulation of the market.

UNFGG’s conception of ‘social market economy’ has emerged as a synthesis of the traditional two tendencies of the socio-economic thinking in the country. That is why a ‘national government’ is most appropriate in implementing the UNFGG program or its proposed Five Year Plan. Any move beyond the present contours of the proposed ‘social market economy’ might depend on the role of the JVP, responsive trade unions and the civil society organizations. Another advantage of the conception might be its relevance or conduciveness to ethnic reconciliation as indicated in the course of the discussion. Another Rajapaksa regime would be completely inimical.

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