18 October, 2017

What Is Going Wrong In The Economic Policy? 

By Laksiri Fernando

Dr. Laksiri Fernando

Neoliberalism is the defining political economic paradigm of our time – it refers to the policies and processes whereby a relative handful of private interests are permitted to control as much as possible of social life in order to maximise their personal profit.”  – Robert McChesney

If we draw an overall balance sheet of the present government, the major deficit is in the economic ledger than in the political one. Although the promised political reforms have not yet been satisfactorily fulfilled, the people seems to feel much ease under the present dispensation than the previous one, according to reliable information. However, the situation might be quite chaotic on both fronts, if corrective measures are not taken in the foreseeable future. The past two years would be marked as not so productive, but abundantly ambivalent. 

There seems to be a common defect or weakness underlying both spheres of economic and political policy making. In my opinion, that can be summarized as lethargy or lack of leadership. Then comes wishful thinking.

Take the example of the new constitution making process. So far, the government has failed to come up with a viable draft for a new constitution. It was admirable that the government allowed the Public Representation Committee (PRC) to gather people’s opinions from various parts of the country. It is also admirable that the Constitutional Assembly allowed six sub-committees to come up with their proposals. However, if the government had believed that a viable constitutional draft would emerge spontaneously out of these processes, that was a terrible mistake. That is not what we mean by democracy or even liberalism. A leadership is necessary, and that is why people elected a new government. The government had lost proper supervision or leadership in the sub-committee process. That is why we are in the present predicament. 

Economic Performance

When we look at the economic performance, the country has stagnated, if not gone backwards. This is not what people expected from the political change in 2015. The overall growth rate has come down than going up. It has adverse consequences for the people. After the end of the war, the GDP growth rate (2010-2014) rose to 6.5 which the World Bank called the ‘peace dividend.’ If it is just a spontaneous peace dividend, it should have gone up today, because now you have ‘better peace’ than before.

However, it has come down to around 5 percent during the last two years, the average per capita income still stagnating below US$ 4,000. At the beginning, it could have been argued that a temporary stagnation happened because some of the ‘corrupt or dubious’ projects of the past administration had to be stopped. But this is no longer an excuse. This does not mean that there have been no income or economic movement within the economy. Unfortunately, however, it has been to make the rich better off, while the poor eking out with difficulties to make their ends meet. This is particularly because of the increase of the value-added tax (VAT) to boost the government revenue disregarding many other alternatives. This was on the advice of the World Bank.

What Sri Lanka must do is what is good for Sri Lanka, and not for the World Bank. There is nothing wrong in strengthening the businesses in the country to produce goods and services, create employment and boost the growth. But it should not be at the expense of the poor, the working people, the needy or the average citizen.

There are major other setbacks in the economic performance when we consider the value of the rupee, foreign reserves, debt payments, sectoral unemployment rate, inflation of the essential goods etc.

What Happened to the Social Market?

There is nothing much wrong in the political policies of the present government. But economic policies have been lethargic and leaderless, and obviously not in the correct direction. At the beginning, they talk much about the social market economic policies. Even I was impressed about the pronouncements. However, this rhetoric has not been transformed into policies or practices. A social-market policy was particularly welcomed given the nature of the national unity government.

It is well known that the two parties in the government, the UNP and the SLFP have had somewhat different economic policies or approaches to the economy in the past. Therefore, to strike a balance between the two, a ‘social-market’ policy would have been ideally suited. However, instead of this balance, it appears that the economic policies have clearly tilted towards neo-liberalism dictated by the World Bank and the IMF. Yet, some people still argue that policies are not enough liberal or neo-liberal and that is the reason for the economic ‘drifting’ (Razeen Sally). 

Ultra-neo-liberalism is revealed not only in internal policies but also in dealing with the international actors. On the controversial bond issue, it is clear that misappropriation has taken place, the government becoming quite ‘liberal’ on its bond policy. Instead of a balance policy of ‘direct placements’ and ‘primary auctions,’ that many countries follow, the government opted to go merely for primary auctions following some IMF guidelines. Even the IMF had not been so deterministic in their guidelines. Yes, primary auctions can stimulate the expansion of private bond market. But in this case, what has happened is a family benefitting exorbitant profits through insider-trading. Now the Minister of Finance has come forward in defending the deal.

There is nothing wrong in primary auction system, if it is balanced with direct placements as well. However, in primary auctions, conflict of interest or insider-trading should not be allowed in whatever the name. In a mixed economy like in Sri Lanka, the direct placements also should be allowed to certain public sector entities such as the EPF/ETF or public banks for their economic viability and ultimate benefit to the people. This can be open even to the insurance sector (public or private). That is what most countries do, not merely guided by neo-liberalism. The participation of the private business companies is important in an economy. However, the public sector also should be preserved and made even competitive with the private sector. That is how China has achieved its mammoth growth. We should not only turn West, but also should turn East for economic guidance.

Wishful Thinking 

This ‘neo-liberalism’ is also revealed in the so-called debt-equity swap deal for the Hambantota port. There is no denial that the former administration had taken loans to the brim. But just because those loans are difficult to pay back, the national assets should not be sold or leased for long periods (99 years!) even to the Chinese. China has revealed that the deal was something initiated or requested by the Sri Lankan government. As I have written in these columns previously, what should have been done is to have a joint venture formed with the same Chinese Company, the Ports Authority taking a 55 percent of equity. This is not a 100 percent swap of the debt, but at least 45 percent.

Debt is bad for a person or a family. But it might be a necessary evil for a developing country, if the loans are used strictly for developmental purposes and not for consumption or extravagant privileges of the politicians or bureaucrats. Although the IMF is strict on debt ratio (debt to GDP) for poor countries, countries like America or Japan are highly debt ridden countries. Only difference is that they have other means for raising loans other than the IMF. Poor countries like Sri Lanka are stuck with the IMF’s discriminatory loan conditions for foreign reserves and many transactions.

Some people want to blindly follow international norms and institutions whether they are on finance, trade or human rights. But considering clearly discriminatory effects on poor countries, we should ask them to be reformed. These include the IMF, the World Bank and the UNHRC. 

It is just wishful thinking on the part of the government or its main drivers of economic policy (the PM and the Finance Minister) to believe that free trade agreements would automatically bring FDI (foreign direct investment) and economic miracles to the country. They seem to be day-dreaming about free trade at a juncture where globalization is slowing down internationally. The only advocate of globalization today is China! The European countries only struggle to salvage the Union. The drive for free trade should be measured, balanced and realistic. One example of this contrary wishful thinking is PM’s interview to The Hindu newspaper on 15 December 2016. Answering a question about ETCA with India, the PM went about loose talk as follows. 

We want the Indian agreement also quickly. Because, one, the Indian agreement paves the way for a tripartite [arrangement for trade and investment] by 2017  Sri Lanka, India, and Singapore. The agreements we have between us mean that we are at the crucial entry points of the Bay of Bengal and we can work further on a closer economic union within the Bay of Bengal [region].”

Here he not only talks about an agreement with India on which India and many professionals in Sri Lanka have reservations, but also talks about a tripartite agreement between India, Sri Lanka and Singapore. Not only that, he talks about a closer economic union within the Bay of Bengal region. Then he repeats the urgency of the Indian agreement as follows.   

“For that to succeed also, we require the agreement with India, because the five southern States [Tamil Nadu, Karnataka, Andhra Pradesh, Telangana, and Kerala] and Sri Lanka  the total GDP of such an economy is over $500 billion with the possibility of doubling to a trillion dollars within a decade or so.”

Now here he talks about a ‘new economic union,’ comprising the five southern Indian states and Sri Lanka, even completely disregarding the quite acrimonious political problems existing between Sri Lanka and Tamil Nadu. In addition, Sri Lanka is a $ 80 billion economy with 21 million population. By pooling this in a $ 420 billion South Indian region with a 300 million population would bring disaster to Sri Lanka, purely considering self-interest of the country.

At least those who propose these fancy ‘economic unions’ should first show proper research, feasibility studies and clear plans. These people also should learn from Brexit and current trends in the EU. At least the architects of the European Union took some decades to evolve their blue prints. But our pundits (sorry to say that) think everything would evolve as magic. The expressed thinking is to double the size of the economy or the per capita income in the region as stated. Why cannot Sri Lanka do it itself, without risking a disaster. Didn’t Sri Lanka manage to double the economy during the last decade (from $ 40 billion to $ 80 billion)? Increased trade or even political cooperation with South India may be desirable, but not definitely an economic union at this stage.        

A Bizarre Professorial Analysis

This is almost the same proposition that recently Prof Razeen Sally has put forward. Going beyond the Prime Minister, Sally has also touched on some sensitive political, ethnic and religious matters. In his “Sri Lanka: Three Scenario’s for the Future” (DailyFT, 17 March), the following is one of his formulas for the economic take-off in Sri Lanka.   

“Multinational firms will establish South Asia hubs in Sri Lanka and link it to global supply chains in manufacturing and services. Sri Lanka will have much closer links with South India, its big business houses and its 300 million consumers. It will be South Asia’s hub and gateway for trade in the Indian Ocean.”

It is very much similar to RW’s wishful thinking. What is most questionable among this Professor’s (Associate Professor of Public Policy at a Singapore university) prognosis of Sri Lanka’s economic ailments is the following.   

The Wet Zone’s natural bounty breeds a fatal complacency, especially in Sinhala-Buddhist culture. …A culture of working hard, planning for the future and earning one’s success has never taken root. It has among the minorities – hardy Tamils used to eking out a living in the barren north and east, Muslim traders, Colombo’s tiny Indian trading castes, even Christians – but not really among Sinhala Buddhists.”

In my concerned opinion, what he explicitly expresses is a ‘racial prejudice.’ We usually hear racial prejudices coming from the majority community. Here comes a racial prejudice from the minority. Even if there is some element of truth in what he says about the Wet Zone, the way he talks about other ethnic and religious groups even living within the same Wet Zone, leads to conclude that he is utterly prejudiced.

Apart from the above prejudicial statements, the economic panacea of Sally is also similar to the views of our PM and those who at present run the economy. Apart from his academic position in Singapore, I understand that he is also the Chairman of Sri Lanka’s economic think-tank, the Institute of Policy Studies! I also wonder whether he is also an advisor to the PM or the Finance Minister?  

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    This comment was removed by a moderator because it didn’t abide by our Comment policy.For more detail see our Comment policy https://www.colombotelegraph.com/index.php/comments-policy-2/

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      Prof. Fernando: Thanks, many good points.

      First Sri Lanka needs a solid manufacturing base and then it can sign Free Trade agreements. You are quite right that FTAs with India, China, Singapore without a good manufacturing and production base is suicide for the SL economy, Sri Lanka needs an evidence based, STRATEGIC and SEQUENCED development plan and policy to develop for the PEOPLE to benefit, but Ranil’s Economic team is a bunch of neoliberal Hit men and corrupt politicains

      There is very little FDI GLOBALLY these days, as US has been lifting interest rates. Sharma’s book on De-Globalization is a good primer on this. Of course civil war and corruption in Sri Lanka has also been one of the reasons for low FDI flows, but in the last couple of years, FDI has fallen all over the world.

      Various experts in Washington have been whipping up the story about Sri Lanka’s “debt trap”: to send the Jarapalanaya govt into panic so that it will sell off strategic resources like Hambantota port and Trinco oil tanks cheaply to those who are militarizing the Indian Ocean.

      Ranil and his Economic Hit men have no brains and are totally dependent on pseudo experts from Washington when it come to policy making. Ranil’s economic team lack evidence based policy making, STRATEGIC thinking and SEQUENCING development policy.

      Also, Govt. of Sri Lanka needs to REFUSE pseudo development PROJECTS that are being sold by varous “aid donors” in the name of ‘Development” . Sri Lanka has suffered for many years and been de-developed – mentally and materially – because of Fake advise and pseudo development projects and phantom aid in an era of Fake News..

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      Dr. Laksiri Fernando

      RE: What Is Going Wrong In The Economic Policy?

      “If we draw an overall balance sheet of the present government, the major deficit is in the economic ledger than in the political one. Although the promised political reforms have not yet been satisfactorily fulfilled, the people seems to feel much ease under the present dispensation than the previous one, according to reliable information. “

      Thanks. Do you think it is time for you to write the Sri Lankan Common Sense Phamplet?

      The author can be Laksiri Pain, Thomas Fernando, or Dr. Laksiri Fernando.

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    Debt is rising. Currencies are backing there currencies with Gold, USA are going to run on a huge deficit. They have increased their military and infrastructure expenditure. American companies will need from USA cash for their relocation of factories. China and Japan are slowing down. They are withdrawing treasuries from USA. Fewer dollars is being used. This money will come back to USA. They may d3efault on their debt if the treasuries continue to be withdrawn. The control of multi national companies is unsure. They depend heavily on Bank credit. They thrive on suppliers from many countries and all ready pay low taxes. Withdrawal of funds by USA on World Bank, UN, IMF will cause concessionary loans to third world Countries to dry up. Switzerland handles funds in many countries and companies and companies may channel hot and black money to investments. Cartels thrive on panic through controlled media and buy at low prices. Our country must engage in equity swops and depend on FDI s for development and not loans. The foreign funds inm share market which is hot money and black money will be withdrawn in a crisis. We must plan for a worse case scenario. FTA with India is not working in our favour. Modi is freeing trade to all countries and is a right winger. This too could create a adverse climate. As the World changes we should be ready for new opportunities

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    Prof. Laksiri: You are quite right that evidence-based analysis is a key ito sound development policy and projects. Today Sri Lanka is becoming a dumping ground for outdated goods in the name of development aid!

    Check out the story: in Sunday Observer: ‘Railway opts for US locamotives; Experts claim serious issues’

    Outdated locamotives will be dumped in Sri Lanka without spare parts and slow down development of a good public transport sector. in the guise of US development assistance.
    This is in effect dumping outdated goods in the name of development aid!
    Sri Lanka needs to have an transparent Development AID POLICY and COORDINATION office and refuse phantom aid and Fake development projects from the US, China, India, Korea etc. Sri Lanka govt. needs to refuse those who dump outdated and useless goods in the name of aid or to further their security interests.

    Over the years Sri Lanka has been systematically under-developed by aid agencies and their pseudo experts. Sri Lanka’s fisheries industry ans sectors is a good example of de-development . With so many acres of sea and rich ocean resources Sri Lanka should be an exporter of canned fish rather than importing fish.
    The ADB, Japanese and Koreas have been working to develop Sri Lanka’s fishing communities but they remain at subsistence level while Japan and Korea have industrialized fisheries sectors.

    . Sri Lanka needs evidence-based development POLICY making. Today This is solely absent in the development enterprise in Sri Lanka today due to over-reliance International Aid and pseudo development experts and failure of public intellectuals.. There are a lot of pseudo public intellectuals and Fake Experts and around these days in the international development industry that Under – develops countries, and peddles Fake Economic Development Advice (like IMF) and Fake Development projects in an era of Fake NEWS. Take for instance the advertorials on Canned fish – Mackarel from Chile these day . Lanka is an island- a country surrounded by rich ocean resources. We have failed to educate people that FRESH FISH is far better than canned fish (often metal contaminated). Why do you think that some US company has go a million $ contract to give 45$ to individuals in the name of protecting Mangroves in North East Lanka to “protect” and de-develop the local fisheries communities?! Ha ha ha!

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    Dear Dr Fernando,

    You have done a great service by holding the blow torch on this highly suspicious character Razeen Sally’s neoliberal prescriptions for Sri Lanka.

    Sally has been an agent of the neoliberal mafia ever since he got his PhD, from where else, but London School of Economics. He was there for for 18 years before joining the neoliberal think tank circuit, big time. He was with the Cato Institute and became co-Director of the European Centre for International Political Economy (ECIPE),another think tank based in Brussels.

    He is an extreme busy body, working in Paris, Johannesburg and a few other spots of the world, serving the neoliberal agenda.He is on the Global Agenda Council for Competitiveness of the World Economic Forum, and was awarded the Hayek Medal by the Hayek Society in Germany in 2011.

    He was sent to Singapore by the American and British Intel also Associate Professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore, basically launch the regime change in Sri Lanka in 2015.

    If you can remember how Sri Lankan politicians, UNP as well as SLFP went to Singapore in procession, and came back and crossed over, it was to meet with Sally and to negotiate payments and bbanking arrangements. The two Mustaphas (father and son) worked with him from Colombo. Younger Mustapha was the last one to go to Singapore, came back and deserted Rajapakse.

    So Dr Fernando, I will send you my email details for further info. I have been keeping an eye on this character for a long time and I can give you a lot of info.

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    Dr.Laksiri,
    “…A culture of working hard, planning for the future and earning one’s success has never taken root. It has among the minorities – hardy Tamils used to eking out a living in the barren north and east, Muslim traders, Colombo’s tiny Indian trading castes, even Christians – but not really among Sinhala Buddhists.”
    This is absolutely true, no matter how much you object as racist?
    Tell me please:
    Why do Sinhalese not work in tea estates?
    Why are all the big rice importers Indian Tamils or Muslims?
    Why is the entire electronic spares trade Muslim?
    Why is the gem trade Muslim?
    Is it not true that when they have an equal chance, the Muslims and Tamils rise to the top?
    Dear prf, you should write another article on this.

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      YUSUF:

      Even Mohomad was a businessman. Mohomad’s wifr hired him to do her business which he did.

      both Tamils and muslims have different mentalities.

      buddhists are different.

      Sinhala is better of without you muslims and Tamils. Because, they are not for money.

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        Dumb Jimmy,
        So you admit that Muslims are better businessman than Sinhala?
        Buddhists only want to sleep ?
        I agree with you.

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    No economic policy will succeed if veneer of corruption is deliberately introduced at various stages..

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    Prof Razeen Sally is right. If he ‘sounds’ racist so be it, but the truth must be told.

    Our dear Sinhalese inhabit this paradise with an inbuilt sense of impunity. Have everything delivered on plate. No need to work for it. Just scratch ones’ credentials and drink tea all day. Let the damn fool minorities work hard, and if they succeed we have ways to bring them down, a peg (or three). AND if they get really demanding, we’ll send in our Sinhala army to sort them out.

    So, now what to do? Maybe, just maybe, if Gota gets in, eschews the nationalist scum, and clears out the self-serving political riff-raff, he will be able to give our complacent Sinhalese community a kick in the jack-seeds and demand that they too pull their weight in the national effort. Life is not all cricket and baila you know.

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      If I say: ” Black people are the best athletes in the world” is it racist?
      Then why is it racist to say “The Muslims and Tamils work harder than the Sinhalese?”
      Dear Dr. Laksiri, please explain to us simple folk.

  • 0
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    Economic and taxation policy matters should be left to experienced government servants with expertise.
    Politicians should not try to do this job. We must first understand we are not Malaysia, Singapore or India.
    When taxes are raised investments will be affected leading to slower economic growth. Tax Concessions and tax holidays were granted to foreign investment in Sri Lanka for a long time. Recently it appears all such tax incentives have been removed. A foreigner who invest in a country will always look for his payback period. Sri Lanka faces risks and challenges in so many fronts. In this context it is not easy to attract FDI. According to a recent statistics FDI has sharply fallen within the last two years. This may be the direct consequences of ad hock and haphazard tax policies of this government. Government should take immediate and sensible corrective measures to rectify weaknesses in the economy in many fronts.

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    The country has gone to doges. That is Sri Lanka !!!!!!!!

    Law of land that Terms of Law and Courts dictated by Sri kota.

    Economy directed by Ranil and gang of four’

    MoF is under good account of Ravi K….. advice to IMF and WB

    High way come under dr Kirella ,

    Higher Education ,that educated by dr Kirella

    Foreign Policies are manipulated by Managala Samaraweera

    Field Marshall of Fonseka will take over democracy and sovereignty of Parliament sooner or later

    Dr Laksiri has accountability for that

    .He was one of the pioneer who behind of current regime brought to power in before 2015 January.

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    Ranil is an over – hyped “leader”..Mr. Clean is really a brainless no good idiot.. and the less said about Ravi K.. the better!!! Yuck!!

    2020 can’t come fast enough! !!

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