Mahoshada

Every country must face the fact that its resources are limited – in simple terms, there is not enough money available to do everything that might be wanted. Choices must be made. If we invest in infrastructure, it means we may not be able to spend more on education. This is true even in the richest countries.

Whether we and the politicians like it or not, there are difficult tradeoffs in how to best utilize the country’s resources that must be recognized. And in a democratic system, it is through the government that the people are meant to decide what choices will be made – how much should be devoted to infrastructure, to education, etc. If we choose wisely, there will be sufficient resources devoted to meet today’s needs (current consumption) as well as for the physical and human investment needed for the economy to grow and generate more resources in the future.

But this approach to managing the country’s resources works only if there is a reasonably good understanding of the costs associated with the choices that must be made. Think of it this way. You go to a Chinese restaurant for a meal and must choose a number of dishes from the menu. And of course you only have a limited amount of money in your pocket. To get the best possible meal with the money you have available, you must weigh what each dish costs and how well the different dishes go together. (You must also make sure that you do not order more than you can pay for with the money you have in your pocket.)

Now consider going to that restaurant, but the menu does not include the prices for each dish. It is going to be a lot more difficult, maybe impossible, to make the choices that will lead to the best meal possible given the amount of money in your pocket. Without knowing the prices, it is likely you will end up ordering more than you can pay for.

Happy Christmas
Everyone knows of the bearded man in a red suit who leaves presents for deserving girls and boys at this time of year. According to the story, the goodies this rathu sahodaraya brings are made far away at the North Pole by his many helpers. The children certainly do not think about who must pay for the wonderful gifts they hope to receive.

In Sri Lanka, if one listens to just about any politician, it would seem that every day is Christmas and the government is Santa Claus. There are goodies to be had throughout the year in the form of subsidies, improved health and education services, new roads and improved transport, meals for school children, public sector jobs, etc. It is a long list and seemingly getting longer all the time. Just about everybody gets something.

And like Santa Claus at Christmas, these goodies come without any clear sense of the costs that must be met. At election time, it is as though the people are given a menu with all of the goodies that government can offer, but without the prices. (This is the manifesto.) As a result, it is not surprising that the government continues to run huge budget deficits year after year. So far, it would seem that no candidate has won votes by telling voters that the country cannot afford everything on the menu.

The World Bank as Santa Claus?
Some would argue that international donors play the role of Santa Claus. With all of the talk of billions and billions of dollars available to the country in donor assistance, it is easy to understand why it might seem as though there are few limits on what goodies can be provided to the people.

There is no doubt that the government can access substantial amounts of foreign aid; but the reality is that a large part of this is in the form of loans – that must be paid back. True, these are concessional, low interest loans. However, as international interest rates have remained very low for a number of years now, the value of these concessionary terms has been much less than it has been in the past. Despite what might be favourable terms, as these loans come due, it necessarily means there is less money available for other things.

And of course donor assistance comes with strings attached. International agencies and foreign governments generally provide assistance to developing countries with the aim of encouraging increased growth and poverty reduction. That is why a substantial amount of donor assistance on offer is, for example, for investment in infrastructure. There is also generally a willingness on the part of donors to support health and education services, although there is little or no enthusiasm to help fund things like fertilizer or fuel subsidies which distort economic decisions and actually undermine growth while doing little to alleviate poverty.

Note that no matter how much the current government would like to argue that fertilizer subsidies are an investment – the reality is otherwise. This reflects a complete disregard for what the term investment means. (Are the Rs 20 billion a year fuel subsidies also an investment?) The danger is that if this sort of thing is repeated often enough, people will come to believe it.

Everyone Pays
No government has ever been very honest with the people and made clear to them that in fact it is everyone that must pay to provide the goodies they bring as gifts. That does not win votes. And policies have evolved over the years to ensure that almost all of the taxes that are collected by the Treasury are largely unseen by those who must ultimately pay them – hidden in the higher prices of virtually all goods and services. Income taxes, the most visible of taxes, contribute only about 15 percent of total government revenues.

If one were to ask all of the people in the country if they paid taxes, the great majority would almost certainly say “no”. Few pay income tax. The rest do not see what they are actually paying. So it is understandable that they feel as though maybe it is a bit like a visit from Santa Claus when they get something from the government.

But, in addition to the hidden taxes being levied, the people of the country pay for these goodies in another important way as well. Because the country’s resources are being allocated to various uses, including providing goodies, without regard for actual costs, the people are not getting the best outcome for the money being spent. It is like being in that Chinese restaurant and ordering from a menu without the prices – we will almost certainly end up with too much (or too little) and not the best meal we might have had if we were able to make use of all of the relevant information.

The result of misallocating the country’s resources year after year is continued low growth and poverty. Real investment that is urgently needed in infrastructure (not fertilizer subsidies!) is either under-funded or ignored entirely. In addition, the persistent large budget deficits absorb savings that could otherwise be used for productive investment by businesses which would provide employment and help the economy grow.

One of the fundamental changes that will have to take place if the goals of increasing growth and accelerating economic development are to be achieved is that the people must gain a much better understanding of the tradeoffs that the country faces in utilizing the available resources. They must be given the menu with the prices included. And when the public comes to better know the amount of taxes they are actually paying, it is likely most will be shocked. Then they will undoubtedly be much more motivated to examine more carefully the ways in which their money is being spent and support politicians who will handle their money more prudently. When this happens, the government will no longer be able to play the role of Santa Claus.