Mahoshada

The New Year is traditionally a time of great hope that the coming year will see great progress in the things that matter most. For many of the people in this country this means finding some way to reverse the recent slide towards violence and to resume the peace process in some form. It also means finally beginning to deliver on the economic promises that have been made year after year, but which have, at best, led to only modest improvements in most people’s lives.

For the great majority of Sri Lankan families, their basic economic needs are reasonably straightforward and within reach if only the government were to consistently manage the economy effectively. The main economic concerns of most families include:

The goal of a decent job that provides an adequate living has been unattainable for millions of people. The strength of the desire for employment can be seen by the hundreds of thousands of people who are prepared to leave their homes and families and go abroad in order to accept menial work at very low wages. The same desire for work can be seen in the hundreds or even thousands of responses that are received to virtually every advertisement offering employment. For many, their lives are largely taken up by a seemingly never ending search for good job.

The scope of the problem is massive. Several million good new jobs are going to be needed in the coming decade if the unemployed, under-employed and new entrants are to find suitable employment. This can be done, but only if the economy is growing much faster so that these jobs can be created in the years to come.

And of course the point of finding a good job is to earn an adequate income. But increases in real incomes can only be sustained if the economy is growing at a good pace so that more and more workers are needed and it is possible to increase worker productivity. These are the kinds of conditions in which both businesses and labour can prosper.

Most people’s experience over the last decade has been that any gains they may have seen in larger incomes have been entirely eroded away through higher prices. If your wages go up by 10 percent but prices increase by 20 percent – you are worse off. And the government, whose responsibility it is to maintain reasonably stable prices, seems either unable or unwilling to do what needs to be done. (The exception in this rather dismal record was the brief two years of the UNF government, which reduced inflation to nearly zero.)

Continual rapid increases in prices not only reduced the real value of one’s wages or salary, but it also makes it extremely difficult to save for the future or to invest in a business. Inflation amounts to yet another hidden tax that falls particularly heavily on the poor and middle class who must struggle to make ends meet.

The burden of inflation also falls heavily on retirees and those saving for retirement. In recent years prices have been rising at rates well above the interest rates on savings, including retirement savings in the provident funds. This means that the value of these savings, in terms of purchasing power – what you can buy with your money – has been steadily declining. It is very difficult to save and plan for a secure retirement when prices are continually rising rapidly.

For the great majority of Sri Lankans, state provided health and education services, along with police and security, are by far the most important functions of government. The state has made a commitment to the people to ensure adequate health care is readily available to all and that all children will receive a good education. Today it seems that the government has largely failed in meeting these commitments. Both of the state run health and education systems have deteriorated to the point where even minimum standards cannot be reached consistently for all. As a result, families that can afford the cost must rely on after school tuition or private schools to ensure that their children are reasonably educated and on private health care providers for medical treatment. Of course the poor usually find these additional costs beyond their reach.

It is worth re-emphasizing that it well within the capacity of the country’s economy to enable substantial progress in addressing these basic economic problems. However, these needs can be fulfilled and the country’s economic potential can begin to be realized only if four changes were to take place:

The country’s politicians and senior economic officials seem to be occupying themselves with endless chatter over relatively meaningless notions such as the ‘balanced economy’, ‘national economy’ and ‘neo-liberal economy’ models. There is far too much talk of ‘pro-poor’ growth, ‘pro-agriculture’ growth, ‘pro-this’ and ‘pro-that’ growth. Anyone who has had much practical experience with managing economic policies ought to know that the nature and direction of economic growth and transformation is not something that can be controlled in the same way as one changes television channels. The process of economic growth is the result of literally millions of decisions being made by consumers, producers, workers and investors – all of this in a constantly changing global environment. Most of this empty rhetoric is an attempt to mislead the people into believing that those in charge actually know what they are doing, and that they have far more control over the economy than is actually the case.

Unfortunately all of this rhetoric has led to the government painting itself into a corner. It has become politically difficult to make the changes needed to put the economy on the right track. The chances of success in the New Year would surely be greater if there was less talk and more action.

The government has been living far beyond its means for so long now that servicing the country’s massive pubic debt is one of the largest claims on the government’s budget. By continuing to borrow large amounts to meet current operating expenditures, as opposed to investment needs, the government is reducing the economy’s capacity to grow and develop in the future.

A good example of this arose just this week when the government announced that it was borrowing US$ 100 million in the international bond market, using its recently acquired sovereign rating. The reason announced by the Central Bank for taking on this additional debt is to support the balance of payments, including the increased cost of petroleum imports. While we will burn the imported fuel now, the government will be paying for it for at least several years.

One does not have to be a financial expert to recognize that this is not a workable long term strategy. Sooner or later, servicing the debt will absorb all of the country’s savings and some very difficult adjustments will be required. Presumably the government is counting on the day of reckoning arriving far enough in the future when someone else is in office. Whether that will happen or not, it is clear that much of the burden of today’s excessive borrowing will fall on future generations while the benefits will be long gone.

To achieve stable prices and allow the economy to grow at higher rates, it is essential that the government stop using savings to finance current expenditure and instead increase investment. It will mean that some of the things that the government would like to do cannot be done. It will also mean that a good deal of unnecessary and wasteful government spending now taking place will have to be cut.

Whenever individuals or businesses spend money, they do so based on some calculations of the costs and benefits. Even when a housewife goes to the market, she takes into account the money she has with her and decides to buy those things which will bring the greatest benefit to her family. To most of us, this is second nature and unless it is a particularly large expenditure, we rarely think of cost-benefit calculations in these terms.

In contrast, the government approaches these calculations in terms of political rather than economic benefits and would appear to pay little attention to the cost. How else could one explain many of the goodies being proposed in Mahinda Chintana and by earlier governments? A case in point: After the UPFA government hired 42,000 graduates in 2004; they found great difficulties in finding work for them to do. Indeed, it is clear that there are many in the public service already did not have adequate work. Now the government aims to hire an additional 10,000 this year.

By absorbing some of the country’s most valuable human resources and employing them in jobs that produce little or nothing, they are reducing national income and undermining the ability of the economy to grow. The answer to the problem of unemployed graduates is not do-nothing government jobs, but to ensure that they have the skills needed to be productively employed in the private sector where they can actually contribute to the national income. The same sort of thinking is required of all government expenditures.

Finally there has been a good deal of political rhetoric about looking inward and relying on the domestic economy to drive economic growth and development. This might resonate politically, but it makes no economic sense. The domestic economy is too small and incomes are too low to support high rates of growth. Other larger, better endowed economies have tried this strategy, including India, and have come up short. The prospects are much better if policy makers and local businesses look outside, overseas – to provide both market opportunities and increased competition in domestic markets to ensure that local firms become and remain internationally competitive.

This New Year brings political and economic challenges that are as great as or greater than any in the past. The good news is that the basic economic needs of the people could be met if more sensible economic management is introduced and maintained. But this would mean that the government must be prepared to face a number of difficult decisions that would inevitably pose political challenges. There is, however, no escaping the fact that it is both irresponsible and self-defeating to continue to squander the country’s limited resources in the ways that have been done for much of the past decade. Things must change if a different result is to be expected.