By W.A. Wijewardena -
Sri Lanka’s new development tagline
Sri Lanka’s current development tagline has been to make it “The Emerging Wonder of Asia” as originally enunciated in Mahinda Chinthana: Vision for the Future and reaffirmed in both the Development Policy Framework of the Government issued in 2010 and the Annual Report of the Ministry of Finance and Planning for 2011 released in 2012.
To have a development tagline of this nature to mobilise the people for a common development cause is not uncommon in history. Immediately after the Bolshevik Revolution in Russia in 1917, Vladimir Ilyich Lenin, the new Czar of Russia, had his “Commanding Heights” to the Proletariat in the New Economic Policy designed to take Russia out of deep depression. Similarly, during the height of the Great Depression of 1930s, the US President Franklin Delano Roosevelt had a “New Deal” under which the government attempted to finance the country out of depression through mega infrastructure projects. Such development taglines create a team-spirit among people, make everyone a development partner and provide the leaders of countries with necessary moral ground for action.
Free and open debates are a must
Thus, Sri Lanka’s current development tagline deserves everyone’s support. However, the vision underlying such development taglines and the strategies proposed should be discussed, debated and, if necessary, redesigned in open forums to make everyone understand their vision and accordingly make them participants in the development process. For instance, Lenin had to explain in full what he meant by Commanding Heights to his comrades who mattered in policy making in the Soviet Union at that time at the Fourth Congress of the Communist International in Petrograd in 1922. The Congress accepted it only after all the grey areas concerning the concept had been fully clarified through a very hot debate by members. As for Roosevelt, his New Deal was commented upon by economists in as far lands as the other side of the Atlantic such as Great Britain, notably by the 20th century’s most influential economist John Maynard Keynes who frequently corresponded with Roosevelt.
Emerging Wonder of Asia not understood by everybody
The writer had the occasion to put the question ‘what it means to be the Wonder of Asia?’ to undergraduates, postgraduate students, mid-level public servants and occasionally to senior public servants and to top entrepreneurs in the private sector during the last two years. The answers he got were vague replies and differed significantly from each other. None had a clear understanding of the meaning of that important vision now being pursued by the country.
It therefore appears that the vision underlying the Emerging Wonder of Asia is just known only to a few top policy makers of the country and all others have defined it according to their own thinking and aspirations in life. This state of affairs is marred by two defects. First, it becomes difficult to say for sure whether the country has actually become the Emerging Wonder of Asia since it has not been properly defined and therefore cannot be tested. Second, it does not make everyone a participant in the development process and thereby making them the owners of development, a consultative process that must be put in place in terms of today’s democratic economic governance principles.
Professor Indraratna’s Presidential address
In this background, Emeritus Economics Professor and Sri Lanka Economic Association’s incumbent President, A.D.V. De S. Indraratna has tried to help the country’s policy authorities by taking the vision of Emerging Wonder of Asia to a public forum. He did so in his Presidential address on the occasion of the Association’s Annual Sessions held in October 2011. When a president of an important professional association like the Sri Lanka Economic Association makes his views known in public, in any other country including the neighbouring India, it spontaneously becomes a hot topic for discussion, debate and even for dissenting. But on this occasion, his address had largely been ignored by professional economists, economic policy authorities and the media who matter for the country’s vision-making and the members of the public who would benefit from the realisation of such a vision.
The release of “Achieving Economic Goals in the Midst of Global Challenges”
Thus, the Sri Lanka Economic Association has now given a second chance for the country to debate his views by reproducing his address in a publication containing the papers presented at its Annual Sessions in 2011. This publication titled “Achieving Economic Goals in the Midst of Global Challenges” was released in Colombo before an audience of invited professional economists last Friday.
Since this is an issue deserving public debate and public comment, the writer thought it useful to critically assess Indraratna’s stand on making Sri Lanka the Emerging Wonder of Asia in the next few years. This will create an open forum for others to take the discussion forward and make the vision under reference a part of the bloodstream of the people of the country.
Indraratna’s address appears in the publication as an Overview of the title of the publication and therefore it serves as a gateway to the other papers that it contains.
Indraratna: Emerging Wonder of Asia is ‘doing better than other Asians’
He has asked the question “What is Sri Lanka’s national economic goal or goals?” and answered that it is nothing but making Sri Lanka the Wonder of Asia by developing it as a Naval, Aviation, Commercial, Energy and Knowledge hub. He has then noted that realising this goal is not easy because it has to be realised within such a short period of five years by 2016 amidst many adverse global challenges that may derail Sri Lanka’s planned action programme for same.
Since the Emerging Wonder of Asia has not been explained in Mahinda Chinthana or in any other subsequent policy document, policy analysts have been left in the dark to form their own view of the vision according to their reading of history and convictions. In his Presidential address, Indraratna has tried to give his explanation of Wonder of Asia based on the current action programme of the government as an attempt at doing better than the rest of Asia. Thereagain, according to him, Sri Lanka has two major challenges. One is to do better than the so called Asian Miracle countries which managed to uplift themselves to developed country status within a single generation. The second is the need for overshooting the growth performance of Asia’s new economic powerhouses, namely, China and India. This is not an easy feat, unless Sri Lanka appropriately integrates itself to the global economy and correctly identifies the challenges posed to it by the emerging global environment.
Indraratna: The essential macroeconomic ground conditions
Indraratna has identified several macroeconomic goals which Sri Lanka has to attain over the next five year period if it is to become the Emerging Wonder of Asia. They include a continuous economic growth of over 10 per cent per annum, reducing the annual inflation to a level of 3 per cent, maintaining the budget deficit at 3 per cent of GDP, converting the current account of the balance of payments to a positive balance, increasing the foreign reserves of the country to at least 6 months of imports, attaining a realistic exchange rate with no volatility and reducing the public debt below 50 per cent of GDP. These macroeconomic goals entail following severe austerity measures by the country and are contrary to the stimulus packages implemented by the country since independence to deliver prosperity to the nation. Since those stimulus packages had not worked to make the country a wonder and left it in a continuous state of underdevelopment, the needed policies today must be something else.
Indraratna: Make private sector the engine of growth
The macroeconomic policy goals identified by Indraratna will bring macroeconomic discipline to the country making the government a saver in society instead of being an unproductive mass consumer. In the writer’s view, this discipline is necessary but not sufficient to attain and sustain high economic growth. Thus, the required discipline has to be supplemented, according to Indraratna, by relying on a bigger volume of foreign direct investments on the one hand and enhancing productivity and making Sri Lanka’s exports competitive in the global markets on the other. Instead of relying on government sponsored economic growth, Indraratna has concurred that private sector should be made the engine of growth and it should undertake productive investments. The government on the other hand should be the provider of infrastructure, facilitator, moderator and mediator, the role which he has attributed to the government in his previous writings too. Sri Lanka is facing many challenges in its march toward the Emerging Wonder of Asia and Indraratna has concluded that those challenges could be overcome by the country by creating an enabling environment with good governance, discipline, honesty and patriotism on the part of both the rulers and the ruled.
Expanded government sector is a problem
It appears that what the government has been doing in the last two years has been in sharp opposite to Indraratna’s prescription as the head of the country’s only economic association. Instead of relying on the private sector, it has principally been a government sponsored and financed development programme. As a result, the government sector has expanded substantially from around less than 1 million public servants a few years ago to nearly 1.4 million public servants today. The rise of the public sector has caused a ballooning of the government’s consumption expenditure creating a big gap between its consumption and income known as the current account deficit or the revenue account deficit. Though the government has valiantly announced that it would keep that gap under control and eventually convert it to a surplus and use those savings for much needed capital investments, it appears to have been caught up in a vicious design of its own. Hence, it has always been a disappointed story of overshooting the deficit in the revenue account planned in the annual budgets. For instance, the budget for 2011 planned for a moderate deficit of Rs 54 billion but ended up with a deficit of Rs 72 billion. For 2012, it was just a negligible deficit of slightly less than Rs 2 billion. But the actual outcome in the first quarter of 2012, according to the data recently released, has been even higher than the total deficit for the whole of 2011 at Rs 107 billion.
Sri Lanka’s complacent deviations from the norms
The desired budget deficit, according to Indraratna, has been at about 3 per cent of GDP. But with an untamed revenue deficit and the need for government’s capital expenditure at about 7 per cent of GDP, this would really be a dream which is difficult to come true in the immediate future unless there is a massive contraction in the government. The consequences are much worse for the other macroeconomic targets prescribed by Indraratna. The rising gap in the overall budget will require the government to increase its borrowings in absolute terms both from within Sri Lanka and from abroad. It creates problems for the country’s public debt levels: Indraratna prescribes that it should be reduced to 50 per cent of GDP, but that target will again be a dream difficult to make come true with ever-increasing demand for borrowing by the government. Then, the expanded government sector has implications on inflation, exchange rate and finally the country’s foreign reserve levels.
High government expenditure leaks out as high imports
With the increased consumption expenditure of the government, people will get new money into their hands but with no equivalent increase in productivity in government services, it would not raise the output to match the demand. The result is more imports and a bigger demand for domestic goods. Imports will increase the country’s current account deficit further exerting pressure for the exchange rate to depreciate. This is also in sharp opposite to Indraratna’s prescription, namely, converting the current account of the balance of payments to a surplus and eliminating the volatility in the exchange rate. To arrest the decline in foreign reserves, it now requires the government to borrow more from foreign sources, thereby reactivating the vicious cycle it had already created but now at a much bigger level.
The rising domestic inflationary pressures
The increase in the domestic demand with no corresponding increase in the domestic output will create pressure for the prices to rise, thereby generating a new wave of inflationary pressures in the economy. This will require the Central Bank to tighten monetary policy by way higher interest rates and credit squeezes. Both will affect the private sector investments adversely thereby further dampening the prospect for Sri Lanka to attain and sustain high economic growth. The current developments in Sri Lanka are exactly in accordance with these predictions.
Ground conditions leading to a ‘devil’s alternative’
As at end of June, the point to point increase in the Colombo Consumers’ Price Index has accelerated to 9.3 per cent up from 7 per cent a month earlier and 6.1 per cent two months ago. The main culprit has been the undue increase in food prices because the demand for food items has been far in excess of their supply. There is growing pressure in the foreign exchange market for the rupee to further depreciate and the Central Bank has resorted to micro level management of the exchange rate which is not effective and will add to the existing shortage in foreign exchange in the market. The result would be that sooner or later, the Bank would be forced to release its foreign reserves to keep the exchange rate at the current levels. But that will reduce the money in the banking system because the banks are now required to exchange rupees they have for dollars being released by the Central Bank. The resultant rupee shortage in the banking system will have further pressure for interest rates to rise; to prevent that the Central Bank will have to pump more rupees to the market and that will have further adverse effects on inflation.
This is exactly like the devil’s alternative suggested by the novelist Frederick Forsyth in his novel by the same title. In a devil’s alternative, whatever one does, his situation becomes worse because he, instead of doing the right thing, does a series of wrong things which the devil loves.
The needs of the day
What are the right things which Sri Lanka should do now? There are many: Reappraise the country’s development strategies in the light of the suggestions made by independent economists, reduce the size of the government, trust the private sector and the global economy, create the required environment for productive investments to take place, ensure Rule of Law, property rights, law and order, good governance, discipline and as suggested by Indraratna, patriotism at all levels.
These ground conditions are a must for Sri Lanka to make its dream of becoming the Emerging Wonder of Asia a reality.
(Writer is a former Deputy Governor – Central Bank of Sri Lanka and teaches Development Economics at the University of Sri Jayewardenepura. This article first appeared in Daily FT – W.A. Wijewardena can be reached at email@example.com )