By W A Wijewardena –

Dr. W.A Wijewardena

Social market economy to the fore

Both the President Ranil Wickremesinghe and the Opposition Leader Sajith Premadasa have declared that the guiding principle of their economic management is the ideal known as the social market economy. This is the economic ideology that was followed by Germany after the World War II since its leaders did not want to go by unbridled free capitalism or state-controlled communism to rebuild the war-ravaged country. It was believed that neither system cared for people who should be the beneficiaries of the economic advancement.

The free capitalism favoured the minority capital owners as against the labour owners that formed the bulk of a country. The state-controlled communism was operated by the ‘party’ and was an instrument for party leaders to exploit the masses promising the delivery of a utopian goal. Since the state exists for the welfare and prosperity of people, either rule is a violation of the first principle of the existence of a state. Hence, Germany sought to adopt the middle-path that would be a hybrid of the good features of the free-market economy and those of the smart government interventions.

The ideology that they created was the social market economy in which the people are to be served equitably by improving the efficiency and productivity through the market, on one side, and distributing the wealth fairly through government interventions, on the other. Hence, for the German leadership it offered the best option to steer the economy to prosperity.

Ordoliberalism

While economic liberalism is upheld, social market economy frowns at neoliberalism. The German way of liberalism is known as ‘ordoliberalism’, a term coined in 1950 following the concept development in the academic journal ORDO. According to ordoliberals, both economic and social dimensions should be combined to provide social justice to people. Therefore, they call for a strong role for the government to regulate the market. Their ideals which in a way were superficial played significant role in shaping the post-World War II German social market economy and its remarkable economic recovery. Hence, ordoliberalism, that does not accept neoliberalism of today seeks to strike a balance between the free-market economy and the government intervention to bring forth the optimal economic outcomes for the prosperity as well as the sustenance of the economy.

The term social market economy was coined in 1947 by Alfred Müller-Armack to describe how the economic policy of Germany differed from the policies followed by other nations. However, the ordoliberal ideas were etched into German economic policy by its main advocate, Ludwig Erhard, who was the Minister of Economic Affairs from 1949 to 1963 and then the Chancellor from 1963 to 1966.

Highly competitive social market economy

Social market economy, or in other words ordoliberalism, is not a new ideal for either of the two warring parties in Sri Lanka. Wickremesinghe, when he sought political power in 2015, promised the electorate that he would establish an economic system based on the social market economy ideology once elected to power. He made a distinction in his social market economy ideology calling it a ‘highly competitive social market economy’. This addition was necessary to take care of the important role played by the export of goods and services in creating wealth for people.

Competition brings in excellence and excellence leads to efficiency and improved productivity, the two essential elements that are needed for a country to play a successful role in international trade. Sri Lanka needs this very badly if it is to beat the frustrating economic stagnation which it has been experiencing since independence in 1948.

Premadasa’s clique is a breakaway group of Wickremesinghe’s United National Party. Its top economic advisors, specifically the Parliamentarian Dr. Harsha de Silva, had been heavily involved in designing the social market economy ideal for the Wickremesinghe government. Hence, it is their pet concept which they had carried with them when they broke away from Wickremesinghe in 2019.

Prosperity through economic expansion

In a book titled Prosperity for All and published in 1957, Ludwig Erhard explained the basic tenets of the social market economy being followed by Germany. He said that prosperity will come from economic expansion and not from the redistribution of the wealth from the rich to the poor. The prevention of the formation of monopolies is an important task of the Government under the social market economy ideals.

He said: “The danger of the impairment of competition is a constant threat from many sides. It is, therefore, one of the most important tasks of a state based on a liberal social order to guarantee free competition. It is truly no exaggeration when I declare that a law against monopolies should be considered an indispensable economic basic law. Should the state fail in this area, it would be an early end to the “social market economy.” The principle proclaimed here means that no individual citizen may be granted the power to suppress individual freedom or, in the name of a false understanding of freedom, to restrict it. Prosperity for all and Prosperity through competition are inseparably connected; the first postulate identifies the goal, the second the path that leads to it” (available at: Ludwig Erhard, Prosperity for All (1957) | German History in Documents and Images (germanhistorydocs.org).

Individual freedom as the pillar of social market economy

Erhard emphasised on individual freedom as the pillar of the social market economy ideal. No one should have power to suppress or restrict individual freedom. This applies to governments, rulers, or social groups which are bent on suppressing human freedom in the name of a false understanding of freedom. Erhard believed in generating prosperity through competition.

In another publication in 1948 under the title Prosperity through Competition, he argued as follows: “It isn’t as if we had had any choice. What we had to do in this situation was to loosen the shackles. We had to be prepared to restore basic moral principles and to start with a purge of the economy of our society. We have done more, by turning from a State-controlled economy to a market economy, than merely introduce economic measures. We have laid new foundations for our social and economic life. We had to abjure all intolerance which, from a spiritual lack of freedom, leads to tyranny and totalitarianism. We had to strive for an order which by voluntary regrouping and a sense of responsibility would lead to a sensible organic whole.”

Rejection of intolerance

Erhard was therefore against any kind of intolerance. According to him, it leads to tyranny and totalitarianism through a lack of spiritual freedom. Society is built on the strength of voluntary regrouping and sense of responsibility. The guiding ethical value is the spiritual freedom associated with Christian humanism. In a chapter titled Christian Humanism: The Ethical Basis of the German Model of Social Market Economy in a book published in 2015 under the title Humanism in Economics and Business, writer Arnd Küppers, has argued that Christian Humanism and social market economy are inseparable complementing each other. In other words, there is no social market economy without Christian humanism.

Writers on Christian humanism have pointed that human freedom, individual conscience, and unencumbered rational inquiry are compatible with the practice of Christianity or even an intrinsic part of that doctrine. Therefore, it follows that social market economy also upholds these values as its ethical base. Hence, those who advocate for the establishment of a social market economy system in Sri Lanka should necessarily uphold these values. Sri Lanka born economist Razeen Sally has also argued that Ludwig Erhard’s social market economy was a liberal concept and not a social democratic concept in an article written in 2016 for the Institute of Economic Affairs (available at: Ludwig Erhard’s social market economy – a liberal, not a social democratic concept — Institute of Economic Affairs (iea.org.uk).

Says Sally in this article: “In Erhard’s inner circle were economists and lawyers from Freiburg University. Their central concept is Ordoliberalism. Walter Eucken, the Freiburg School’s founding economist, outlines a free-market order, constituted and regulated by a “policy of order” (Ordnungspolitik). Ordnungspolitik maintains the market economy’s framework of rules, but it does not intervene in the economic process: price-setting and resource allocation are left to market participants. To use a classical-liberal analogy, the state should be the market’s umpire, but not one of its players.”

According to this umpire’s role played by the Government, the freedom of contract and freedom to trade should be upheld by the Government. It should avoid discriminatory interventions to favour particular sectors and firms. Economic policy should be free from erratic changes that cause private economic agents to shun risk-taking and investment. This applies to restraints on trade both by the public entities and private players.

No to erratic policies

There are many economic policies that have been taken in Sri Lanka in the recent past which are erratic in nature and therefore do not sit comfortably with the ideals of the social market economy.

One policy was the importation of eggs from India when the local egg prices were settling in the market at a level to be commensurate with the increased costs. The cheap imported eggs released to the market was to ease the cost of living of the consumers but at the expense of the poultry industry in the country. With no new investments coming to the poultry sector and the closure of the some of the poultry farms, the supply fell, and the shortage could not be filled by continued import of eggs from India. Hence, the price fall was temporary providing only a short time relief to the consumers. Now egg prices have moved up again, but until the market settles again under the new conditions, there will be adverse impact on the sustenance and future growth of the industry. Another erratic policy is the sudden decision taken without adequate warning to farmers or millers that the Government entity – Paddy Marketing Board – will not buy paddy from farmers during the current Maha season. Instead, the Government will arrange the small and medium scale millers to get bank loans and buy paddy direct from farmers at the Government guaranteed prices. According to policymakers, the decision is neutral on paddy farmers or paddy marketing: the vacuum created by the withdrawal of the Paddy Marketing Board is being filled by private sector millers. But there are a number of structural issues which have been ignored by the government policymakers.

One is that those millers should have sufficient capacity to store the paddy they buy from farmers. The second is the creditworthiness of the millers concerned as assessed by lending banks. A third is the capacity of the lending banks to make available the needed resources to lend the millers to meet the government goals. A fourth is the logistic factors like the transportation facilities to transport the paddy from farms to the stores. A fifth is the issue of non-miller paddy buyers who buy paddy, keep it till they get a good price and dump the same in the market.

Without sorting these issues, the policy will not work in the field. Already, with no Paddy Marketing Board in the scene, farmgate prices have fallen below the Government guaranteed prices. It will therefore enable the moneyed millers and non-millers to form monopolies in paddy marketing and milling. It not only has frustrated the Government move but also created an unexpected consequence in the form of monopoly building by using the Government’s sudden change in policy. This monopoly building is against the social market economy ideal as presented by its main player in Germany, namely, Ludwig Erhard.

Need for a code of ethics

It is therefore essential that the promoters of the social market economy ideal should be guided by a code of ethics. That code should include the preservation and promotion of human freedoms, freedom of thought and freedom of expression, and a thorough examination of all the possible consequences before a decision is made. Sri Lanka, if one goes by the recent happenings in the country, lacks both. But without such a code, adoption of the social market economy ideal is meaningless.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com