By Hema Senanayake –

Hema Senanayake

When a government makes economic policy errors and do not understand that that they do it, the disruption of economic activities of citizens is quick, devastating and has wider impact on day-to-day life. This is what is happening in Sri Lanka. When I told this to my wife, she raised an important question. She asked whether I mean to say that there are no good economists in the government who can advise the President, Minister of Finance, and the cabinet. I said, in fact, there are reasonably well-trained economists in the Central Bank and the Treasury, but if they do act with motivated reasoning instead of scientific reasoning, they just tell what the President wants to hear, not evidence-based opinion.

As some literature explain motivated reasoning is the phenomenon in cognitive science and social psychology in which emotional biases lead to justifications or decisions based on their desirability rather than an accurate reflection of the evidence. If economists in Central Bank and Treasury do work with motivated reasoning, then what the President and Minister of Finance are hearing is not true or else they just hear what they want to hear. This process can ruin a country. You see it now. But denial is still rampant. Recently, Minister Prasanna Ranathunga said that all countries have same problems as Sri Lanka. No, it is not, but he is not awakened to the reality as the method of reasoning is highly motivated, ignore facts, data, and evidence. Forget about politicians, but when well-trained economists and higher officials in the Central Bank do it, the resultant effect is disastrous, and amazingly they bear no responsibility. How disastrous is this process? Let me give you two recent examples.

Dr. P.B. Jayasundera is a senior economist with having good experience. No argument about it. He was the secretary to the president until recently. In the middle of last year many independent economists and experts pressured the government to have a preventative or proactive solution to the imminent balance of payment (BOP) crisis or more commonly known as dollar crisis. They said, go to IMF. Even JVP’s Sunil Handunneththi once echoed the same idea adding that IMF should find ways to stop corruption. But Dr. Jayasundera being at the side of President always gave the wrong advice. He said that going to IMF is not the solution, because “the alternative was to consolidate projects already on the ground, for which funds are secure, and to make use of them. If you execute those projects, you can get the money,” he says. He further says: “The World Bank/Asian Development Bank project portfolio covering such sectors as water, irrigation, highways, education and health is around US$ 3 billion with utilization spanning three to four years. So, if you fast-track them, remove the bottlenecks for implementation and focus on those, the disbursements are a money flow… Last year saw the highest ADB disbursement at $ 750 m (Rs. 149 b).” His opinion was published on July 25^th, 2021, on Sunday Times. This is highly motivated reasoning. Did he fast track any project before he left the Job in January this year?

However, on August 21, 2021, in Financial Times, rejecting his solution, I wrote that, “This is an amazing but awful solution. For the first time I am hearing from a senior economist that BOP crises can be resolved from project loans provided by World Bank/Asian Development Bank. Interestingly, the IMF which is the international organization that is mandated to help in resolving BOP crises, has different set of financial instruments but it has never listed project financing of World Bank or Asian Development Bank as mechanisms that support resolving BOP problems.”

However, I pleaded that his said alternative and seeking IMF help must not be mutually exclusive. Instead, seeking IMF support will be much more favorable for the Government to ‘fast-track’ the disbursement for projects identified by the World Bank and Asian Development Bank. Both can happen together. I further said that lying to people is a crime or he must be hiding something (like forcing to sell something). This is one of the best examples for motivated reasoning by a senior economist and he might not be the only one, in this government. That is why President must listen to his worst economic critics in front of his best well trained economic advisers on the subject in an economic roundtable. This is the need of hour as the country is facing extremely bad economic situation.

The second example is coming from Nivard Cabraal, the governor of the Central Bank. After the forced resignation of Prof. W.D. Lakshman, Cabraal was appointed as the Governor of the Central Bank. After assuming his duties, on October 01, 2021, he announced a six-month Road Map for the period beginning on Oct. 01^st 2021 to March 31, 2022. In the Road Map, he predicted a gross inflow of $ 10.85 billion during the first three months of the Road Map ending on December 31, 2021. This was not just gross overestimation; this shows his biases, and these biases are motivated to prove that he is doing well in the new job. My question is why the President, Prime Minister or the Minister of Finance do not ask him where the macroeconomic stability is, he promised to bring in by announcing his six months ‘Road Map.’ Mr. President, you can’t govern this country like this if your officials are not held responsible for their advice. If you do, they will not act with motivated reasoning, instead they will make their opinions based on good economic theory, data, and evidence. The difference is that Minister Johnston Fernando can say that there is no fuel shortage because he sees that there are a lot of vehicles running on the road, but if an economist uttered the same rubbish, it is motivated reasoning.

If the President, Prime Minister, Minister of Finance and the whole cabinet want to hear what they want to hear, then this motivated reasoning takes root deep in the government. It is a disease. The “organic farming revolution” showed how bad this disease is. Minister Mahindananda sacked one of the country’s best Agricultural Scientist Professor Buddhi Marambe for expressing the best evidence-based opinion. The government put our country from self-sufficiency to the period of early 1960s, where 60% of rice requirement was imported. How long it took? Just one cultivation season. It is true that their decision has been reversed. But government cannot be run on trial-and-error method, especially in a time where extreme policy responses are needed.