Mahoshada

“Economists must not only know their economic models, but also understand politics, interests, conflicts, passions – the essence of collective life. For a brief period of time you could make changes by decree; but to let them persist, you have to build coalitions and bring people around. You have to be a politician.” Alejandro Foxley, Chilean Minister of Finance (quoted in Williamson and Haggard [1994])

There are many economists in Sri Lanka working both in and out of government who devote a great deal of their time to analyzing the changes that need to be made for the country to realize its economic potential. And while it is all too true that rarely do economists come together to discuss the issues of the day and actually agree on what needs to be done – it is generally the case that when what are largely extraneous details are stripped away, there is usually broad agreement on the basics of the policy and institutional reforms needed. It has to be admitted that most economists love to debate passionately the finer points of policy.

At one time or another, most economists are asked by exasperated people who are not economists, if their profession actually has the answers needed to resolve the country’s problems, why aren’t things getting better? Why does to cost of living continue to increase seemingly beyond control? Why do so many educated young people still find it difficult to find a decent job? Why can’t the government fix the big day-to-day economic problems facing most people? Not surprisingly, an important part of the answer is politics.

The ‘Laws of Living’
“Political economy was the original term for the study of production and the relationships of buying and selling and their relationship to laws, customs and government. Rousseau gives the etymology of it as coming from oiko - house plus nomos law - the laws of living. As such it was used by Adam Smith, John Stuart Mill, David Ricardo and Karl Marx, along with the term “economist”, to mean someone who believed that political and social problems could be solved by means of political economy.” The Wikipedia Online Encyclopedia.

In the beginning, with the publication in 1776 of Adam Smith’s Wealth of Nations, economics was seen as inextricably related to politics. The study of the ‘laws of living’ – how individuals and countries utilize the available human and physical resources – was called political economy. Then, at some point between 1860 and 1890 the disciplines of economics and political science began to diverge and eventually to function more or less in isolation. However, while this sort of specialization may make sense in an academic environment, it does not correspond very well to the real world – at least when it comes to trying to find ways to overcome real world economic problems. After all, the value of economics (and economists) lies in its ability to solve problems in ways that will leave people better off.

The Rising Cost of Living
Year after year, a very large percentage of Sri Lankans would readily identify the rising cost of living as the country’s greatest economic problem. Virtually every politician running for office has at some stage solemnly promised to stop (or reverse) the seemingly unending increase in the cost of living. Yet despite the assurances made by all political parties, little progress ever seems to be achieved.

It is important to keep in mind that there are two key aspects to the cost of living problem. The first is the general rise in prices – inflation. According to the Central Bank Annual Report for 2005, average inflation last year was about 11 percent, up from 8 percent in 2003 and 4 percent in 2003. So accelerating inflation in the last couple of years has certainly fueled concerns about the cost of living. But even when the rate of inflation is significantly reduced, as the UNF government did, bringing it down from over 12 percent to around 4 percent – it appears that people’s concerns about the cost of living are not greatly reduced.

This is because the other key aspect of the problem is the steady and substantial deterioration in the quality of public services – especially education, healthcare and public transportation. While the prices of these important services generally do not increase at anything like the rate of the other goods and services, what people have been getting for their tax rupees has fallen drastically. Often this means that additional costs must be incurred, such as for after-school tuition, private healthcare, etc.

There are straightforward economic answers to both of these problems. Inflation can be kept low through proper management of the country’s monetary and fiscal policies. And the availability and quality of public services can be maintained at high levels with more efficient public management. Many other countries have been able to overcome both of these problems. Why then can’t they be fixed in this country?

A major part of the answer lies in the political culture, where there is an almost unshakable belief by politicians that campaign promises to deliver “goodies” – public sector jobs, subsidies and handouts and, yes, reversing the rising cost of living – will always deliver more votes than would otherwise be lost. Most politicians make these promises even when they know better, know that they can never really be kept. (Sadly, some politicians do not know any better.)

And voters actively collude in their own deception – they suspend their usual critical faculties that would in normal circumstances alert them to the fact that they were about to be cheated – to be sold a ‘pig in a poke’. Election after election, it would seem that they willingly deliver their votes for promises they should know will rarely if ever be kept, in effect proving the politicians’ premise correct.

Another Economic Problem – Unemployed Youth
Consider the problem of large numbers of unemployed educated young people. Recent data from the Department of Census and Statistics should be troubling. These indicate that nearly two-thirds of unemployed females have completed O-Levels or above while half of unemployed males have completed their A-Levels. (For the entire country, the unemployment rate is 8.3 percent – higher than it ought to be. And this does not reflect the substantial numbers who are significantly under-employed.)

Politicians’ answer to this persistent problem is generally to promise public sector jobs to those who are unemployed. The current government made a promise to hire some 42,000 unemployed graduates a major part of their 2004 general election campaign. More jobs were promised in the recent presidential campaign. This was not done because it was thought to be a sensible economic solution. Virtually everyone is (or should be) fully aware that the size of the public sector is already far larger than the country can financially support. The cost of compensating public sector employees is draining much needed money away from what most people would agree should be higher priorities – such as meeting basic social services such as education and healthcare.

Most of those in government appreciate that while expanding the public service may offer the appearance of a short term political solution, it also diverts funds away from investment. This reduces economic growth, which is the only real solution to this problem. Yet the promise of government jobs is seen as having a political pay-off that implementing more appropriate policies that would lead to higher growth do not. Once again, it seems that political calculations consistently lead to the wrong economic answers.

Strengthening the Political Economy
What then is the solution to these and other fundamental economic challenges facing the country? Are better politicians needed? Better voters? As hard as it may be for some to believe, Sri Lankan politicians and voters are probably no better or worse than in most other countries.

It would be easy to think that if only politicians and voters brought a better understanding of basic economics to the polls at election time that these seemingly irrational responses to pressing problems would be quickly resolved. Both would see where their true interests lay and respond accordingly. While a better understanding of economic issues amongst the public would almost certainly lead to improved governance and better economic performance, it is not the fundamental problem. Most voters and politicians have enough common sense to appreciate the fact that promises presented in election manifestos do not offer the answers the country needs. No, what is actually needed is a political culture where both politicians and voters essentially engage in a more straightforward relationship in addressing these types of issues. If voters hold politicians to a higher standard, then they will respond if it means being rewarded at election time. It is often said that voters get the government that they deserve.

But economists can also do much to contribute to a stronger political economy by providing guidance and support that sticks to fundamental economic principles. Too often economists are ready to promote ideas that have political appeal, despite the fact that they make little sense economically, lending these proposals a degree of respectability they do not warrant. One of the most eminent economists, John Maynard Keynes, was once quoted as saying that “economics is the science of thinking.” He did not say that economics is the science of wishful thinking.