Mahoshada

This article marks a milestone of sorts; it is the 100th article by this author published in the Sunday Island since June 2004. As such, it represents an opportunity to step back for a moment and attempt to provide a broader perspective on the reasons for exploring a wide range of issues having to do with the country’s goals for economic advancement that have been raised in these pages.

Contributing to the Debate
Sri Lanka today faces a number of daunting economic challenges. These range from finding ways that will allow those living in poverty to find employment so they may begin to earn a decent living; to generating sufficient numbers of productive jobs to meet the aspirations of graduates and others; to implementing policies that will bring an end to the seemingly endless increases in the cost of living that continue to make it difficult for the poor and middle class to meet their basic needs; and to find ways that will ensure that the economic benefits of economic development are spread throughout the country, particularly to the rural areas. The list could go on.

These are almost all complex issues, made all the more so by the unique circumstances that the country faces. And while there are no simple answers to these issues, whatever what any commentator might suggest, there is much that can be learned from the experiences of other countries in addressing similar challenges. However, it can be said with some degree of confidence that new ideas on how to meet these economic challenges are needed. Continuing to follow the same path that has led to the current conditions is unlikely to lead to solutions.

A vigorous and wide-ranging debate on economic issues is needed if effective solutions to the country’s economic challenges are to be found. This debate should be open, including ideas from all sides. This debate should also be rigorous, testing the ideas offered against the fundamental tenets of economics that have been found to provide sound principles on which to build successful economic policies. There is little point in pursuing answers that are based on wishful thinking and economic models that are unrealistic and unworkable. First and foremost, these articles over the last two years have sought to contribute to such a debate on economic issues.

Looking Back
There are several ideas that have tended to appear in a number of the previous 99 articles presented here. One of these is the critical importance of increasing the rate of economic growth in ways that are both sustainable and effectively increase national productivity. This issue has arisen frequently because a there have been a number policies and actions taken by the government which have undermined the prospects for increased economic growth.

It is important to emphasize that economic growth is not – or should not be – seen as an end in itself. It is a means to an end – improving economic welfare. Growth is vitally important because it is the only way in which living standards for all people can be substantially increased. High economic growth rates are necessary if the economy is to generate the large numbers of jobs that are needed to lift people out of poverty and to meet the aspirations for a better life among the working and middle classes throughout the country. Millions of new jobs are needed. And sustained higher growth rates are also necessary to generate the resources that the country needs to provide adequate healthcare and education for all as well as to meet much needed investments in infrastructure in power, water and transportation.

Economic growth largely depends on two key factors: the level of investment and the productivity in which the country’s resources are employed. These factors are not unrelated. For a country to maximize its growth, it must maintain an economic environment that will attract substantial amounts of investment – from both foreign and domestic sources. (Relying on domestic investment alone is unlikely to be sufficient to sustain high growth rates.) However, new investment is not the only way to increase a country’s capacity to produce goods and services. Using existing resources in ways that enable increased production of goods and services will lead to higher growth. So, too, will moving resources away from the production of lower value goods and services to the production higher value goods and services.

The successful pursuit of high rates of economic growth requires sustained efforts by the government. This task is made all the more difficult by the increasingly competitive and increasingly interconnected global economy. Sri Lanka must compete with many other countries for investment. Sri Lankan firms must continually strive to improve productivity in order to remain competitive in both domestic and foreign markets. If the country is to achieve its goals to eliminate poverty and substantially raise living standards, policies and actions by the government that waste human and physical resources by diverting resources to less productive uses, must be avoided at all times.

A second idea that has arisen in many previous articles presented during the last two years concerns the role of the public sector in the economy and more specifically, the ways that the government’s continued high budget deficits are undermining the country’s future economic potential. Simply put, no family and no government can continue to borrow indefinitely to pay for current consumption. This course leads to increasing debt that will sooner or later reach a point where it will be unsustainable, whether it is for an individual or a government. However, it is the case that, unlike individuals, governments do have at their disposal ways in which they can for a time get around their debts, such as by reducing the value of the currency through inflation. But, this leads to the ever increasing cost of living and in any case, these methods are never effective for very long.

It should be noted that governments, like individuals, can usually continue to borrow if it is for profitable investments, not for meeting current expenses. Singapore’s national debt is higher than that for Sri Lanka as a percentage of GDP. But in the case of Singapore, this has largely been incurred for productive investment that has led to one of the highest standards of living in the world. In this country, much of the public debt has been incurred in order to pay government salaries and the interest costs associated with past borrowing. By absorbing large amounts of the savings of individuals and firms through government borrowing, high budget deficits divert resources away from productive investment, undermining potential economic growth.

A third idea that has re-occurred in a number of previous articles concerns the country’s approach to international trade. Sri Lanka is a small country with limited domestic markets. In order to profitably produce and sell goods and services at the levels needed to sustain high rates of economic growth, it is essential that the country be able to sell what is produced competitively in foreign markets. Relying primarily on domestic consumers will not work.

But the idea that a country can maintain high levels of protection for its domestic producers while at the same time rapidly expanding exports also will not work. This is because protecting domestic producers amounts to a hidden subsidy that is inevitably paid for by consumers and exporters. Imposing this burden on exporters makes it more difficult for them to compete in foreign markets. And subsidizing businesses through protection diverts investment away from what would otherwise be more profitable and more productive export activities – also undermining the country’s potential for economic growth. The only way a country can expect to be a successful exporter is if it keeps its barriers to imports at relatively low levels.

All of these recurring ideas are of course interrelated. If one accepts that the principal economic goals of the country include the elimination of poverty while substantially improving economic welfare more generally, then sustained higher rates of economic growth are essential. This can only be achieved if all of the available human and physical resources are employed in the most productive ways possible. It is also essential that access to resources, particularly investment, be maximized. This means maintaining an economic environment that will consistently attract much higher levels of investment. Key elements of an attractive environment include following sound fiscal policies (e.g., low government budget deficits) and an open trade policies.

Looking Ahead
If Sri Lanka is to achieve its principle economic goals, there can be little doubt that it will be necessary for there to be a substantial reallocation of resources to more productive areas of employment. For example, there are millions of small farmers trying to earn a living on plots that the Department of Census and Statistics suggests are too small to be economically viable. These people are currently trapped in livelihoods with very limited prospects for improving productivity which ensures that they will remain poor for as long as they are constrained by policies that limit them to producing paddy on excessively small plots.

The public sector also faces the eventual prospect of substantial restructuring. With over one million people employed in the public sector, there is little room in the government budget beyond paying salaries and meeting the costs of the growing public debt. There is, in particular, little room for investment in essential social services such as education and healthcare as well as for much needed infrastructure in power, water and transportation. By all accounts, virtually all government departments and agencies are grossly overstaffed, employing far more people than are needed. This greatly reduces the productivity of the public sector, diverting resources away from activities that would strengthen the country’s economy.

What is standing in the way of making the changes necessary for much improved economic performance? Not surprisingly, one of the major impediments to change is politics. Farmers and public employees constitute important vote banks and few politicians are prepared to see these disrupted – despite the fact that change would lead to substantial economic benefits for the people involved.

The Mahoshada Perspective
There is no simple or unequivocal blueprint for economic success. As the eminent Canadian historian, Donald Creighton once said, “government is an art, not a science, and an adventure, not a planned itinerary.” But it will be difficult if not impossible to bring about the changes that will be necessary for economic success without a vigorous pubic debate on the issues involved. Such a debate should not be limited by political ideology or by an unwillingness to consider all available options. The primary goal of these articles is to contribute to this debate in some small way, to present ideas that are not widely considered. The approach is to examine issues and test them against the fundamental principles of economics, where possible drawing on the experience that has been gained in other countries facing similar challenges.

For those who may be interested, the first 55 articles presented here, including several rejoinders responding to these articles, have been published by the Pathfinder Foundation under the title The Mahoshada Perspective and may be found in bookstores. The Pathfinder Foundation seeks to play a catalytic role in changing attitudes towards the role of government in the economy and society, markets, globalization process and private initiatives from the legislators to government officials, civil society groups and the general public, through research, information dissemination action and dialogue. (More information can be found at www.pathfinderfoundation.org.)