Mahoshada

The election this week looks as though it will be one of those watershed moments in the country’s history, when a decision is taken that will have major repercussions for years ahead. 1956 was such a time, as was 1977. It is not an overstatement to say that the Sri Lanka is at a critical crossroads – in this election there are two very different directions being proposed for both the political and economic challenges facing the country. The road taken will undoubtedly shape the lives of today’s children, and their children after them.

Here we will focus primarily on the economic alternatives being offered. However, we cannot lose sight of the fact that one of the most important determinants of economic performance in the coming years will be whether or not the peace process will be successful in bringing a just and lasting resolution to the ethnic strife that has torn the country apart for more than two decades. Failure and a return to war would have profound negative economic consequences.

Sri Lanka’s Economy in the World
The rather incoherent debate that has taken place over a national versus an open economy says as much about the underlying confidence in the ability of the men and women of the country to compete effectively in the global economy as it does about ideology. Those who aim for a so-called national economy seem determined to deny the reality of a rapidly expanding reach of the global economy and who seek to remain as much apart as possible. Whether this is rooted in local language issues, a sense of a unique cultural identity, xenophobia or simply a fear of failure probably matters little. Sri Lanka’s economy has nearly always been and will undoubtedly continue to be very much linked to the world economy through trade in goods and services. Adopting a contrary political stance will not change this underlying reality.

Many politicians seem to think that a country’s leaders have a choice whether or not their economy will be integrated into the world economy. They fail to understand that the great majority of important economic decisions are being made daily by men and women individually and through the private enterprises in which many of them work. It is through markets that these decisions influence how the country’s human, natural and financial resources are largely utilized. When the housewife goes to the market to buy milk powder, a young woman goes to work producing apparel for export or the farmer applies fertilizer to his paddy land, all are directly engaged in one form or another in the international economy. In practice, politicians can no more influence the growing importance of linkages with world markets than they can influence the weather.

Whether or not the country chooses to embrace the opportunities and accompanying difficulties posed by the increasing interaction with the world economy, or instead attempts to reject the existence and pressures associated with these economic forces will determine economic performance and the living standards of the people for years to come. It is only by effectively coming to grips with these challenges can the improvements in economic performance needed to substantially improve the lives of the people of Sri Lanka be achieved.

The two main presidential candidates offer two very different visions of how to develop the economy. On one hand, Mahinda Rajapaksa indicates that he would pursue the national economy approach that has been pushed by his JVP colleagues and others in his camp. They would attempt to create as much distance as possible between the local economy and external economic links. This approach would also necessarily entail increased government involvement in economic decision making. The reality is that the government cannot build a wall around all types of economic activities; so it will pick the winners it wants to support and leave the others to compete and pay the bills. Unfortunately for the country, when governments pick winners, they do so based on political not economic considerations. That is why there are so many government created white elephants.

The UNP candidate, Ranil Wickremesinghe has always taken the position that the opportunities available to the country though the international economy should be embraced and actively pursued. These views are based on the recognition that Sri Lanka has a very small economy with limited domestic markets and the only way that the country can fully develop is by taking advantage of the much larger world market. It is also underpinned by the recognition that Sri Lankan individuals and enterprises have shown that they can compete with the best in the world when they are not encumbered by excessive government interference, high taxation or regulatory red tape.

As a one-time Minister of Industries he had ample opportunity to see firsthand the corrosive impact of direct government involvement in commercial activities. It was also in this capacity that helped to develop ways in which public support could be effectively provided for businesses seeking to improve competitiveness and engage more actively in export markets. (The well regarded TIPS program was one such innovative program that provided foreign assistance to export-oriented firms in ways that they themselves determined.)

Ensuring that Market Machinery Works Efficiently
To meet the challenges posed by the country’s place in the world economy, it is essential that the policies and institutions through which the economy operates function more efficiently. In particular, it is vitally important that markets for land, labour and capital – the key factors of production – function efficiently in ensuring that these basic resources are employed with maximum productivity. A major reason for the unnecessarily high rates of poverty and low income levels has been that these markets have operated poorly for many years. Large numbers of people, large amounts of land and finance, have been employed in ways that are not very productive. If only a few among those employed are producing goods or services of value, the country will be poor. If many are productively employed, the country will be well off.

A large and highly inefficient government is the principal culprit in the large scale misallocation of resources that has hobbled the economy. Not only does the public sector directly absorb a disproportionate share of the country’s human, land and financial resources, to pay its bills it also imposes taxes, laws and regulations that distort the economic decisions of private individuals and businesses – typically reducing their productivity as well. There are of course vitally important economic functions that must be undertaken by the government, including for example ensuring that commercial laws and regulations are efficiently maintained. But when large parts of the government are ineffective and all government employees are poorly paid, these vital functions also suffer.

The country’s market machinery that drives the economy works best when left as much as possible to the private sector making decisions based on economic, not political criteria. For many years, both main parties have remained committed to the view that the private sector is the “engine of growth” and has the lead responsibility in making the economic machinery work effectively. There has, however, been a change in this view since the UPFA government assumed power. This can be seen in the recent budget speech, where the Minister of Finance stated that “the private sector is as important as the public sector in the development strategy that our Government has consistently adopted since 2004.” Now, it seems, the current government sees the public and private sectors as having equal roles in the economy.

Mahinda Rajapaksa and his colleagues intend to expand the role of the government in the economy. In Mahinda Chintana the Prime Minister promises that he “will not prune the public sector during my tenure of office.” He goes further, making commitments to expand the public sector workforce. It is clear that under a government headed by Mahinda Rajapaksa that there will be no cutting back on the size or role of government in the economy. This means that the current misallocation of key resources will continue, acting as a drain on the economy and reducing growth while keeping incomes low. How long this can continue in light of the growing cost of maintaining the government and its diminishing ability to deliver benefits to the public is difficult to say. What is reasonably certain is that without a major change in direction, some form of crisis will arise that will impose change. (See the accompanying article on the budget in today’s paper.)

At the center of Ranil Wickremesinghe’s economic strategy has been a process of reform that would enable the country’s market machinery to work with increasing efficiency in order to generate the increased economic growth needed to reduce poverty and expand employment. In a rapidly growing economy it becomes possible to reform and improve efficiency in the public sector relatively painlessly. There is also, as noted above, the recognition based on his experience in the Ministry of Industries that when the government is engaged in commercial activities, the results are almost always poor. As a result there is no confusion of the most economically effective roles for the public and private sectors.

One Economist’s Perspective
There are of course a variety of different factors that enter into a decision on who to vote for in this election. And this writer would not presume to tell anyone who they should vote for. But in an environment where political messages are often designed to confuse or make less clear the distinctions between the candidates, it is important to keep in mind that there are major differences in how the candidates would handle the management of the economy. And as noted at the outset, these differences are likely to have a substantial influence on the future of the country for a long time to come.