Economics and Politics in period of transition ***
Sri Lanka is experiencing a period of transition. It is a transition from a crony capitalist dictatorship to a liberal democratic capitalism. The process of change or transition initiated on January 8 and reinforced on August 17 is nothing more than that. To ascribe to it characteristics of a social revolution is a gross exaggeration though politicians are at liberty to identify it as such.
A period of transition is such that the old structures though defeated are still not vanquished and the new ones are still struggling to be born. An inevitable struggle takes place for the defeated strike back with vigour and venom of a snake harmed. The ultimate victory of the new is yet not established. This political factor has to be kept in mind especially in mind when considering economic and political reforms.
The legitimacy for the transition depends on the trust placed by the people in the present administration twice in the course of several months. Obviously that trust is not unconditional or everlasting. The moment this trust wanes off the legitimacy of the government gets eroded.
Unfortunately the importance of economic revival and measures towards its attainment are hardly the subject of public discussion. Still less attention is paid to the relation between politics and economics in any reform process that must be followed.
To put it in ordinary parlance two things should be sustainable for the success of the transition. One is the sustainability of the masses at present cost of living or how much further hardships could they endure. People expect better living conditions and not a worsening of them. If the latter happens their trust would be lost giving way to the defeated to come back to the saddle. The other, related the first is the sustainability of the Government. Should it fall the consequences could be a return to crony capitalism and its dictatorial ways. That is why economics cannot be divorced from politics or text book cures or universal recipes formulated elsewhere, would not suit us.
Both the Government and the people should understand that every inch of ground has to be won in a relentless struggle with the enemy. It was so in the struggle to get the 19th Amendment to the Constitution passed. It actually deranged the composition of the Constitutional Council. More and far bitter struggles lie ahead despite the consensual nature of the Government. While burning economic issues have to be resolved political expediency too should not be forgotten in doing so.
Most economists agree that a rosy picture of a healthy economy is a luxury we do not possess at the current juncture. Despite all talk of ‘rapid development” and “miracles” several negative economic factors have crippled our capacities for development. They include among others a debt trap into which we have fallen, huge deficits in the terms of trade and balance of payments and an economy not geared for production.
We live in a highly globalized world and it is necessary for us to take part in the international division of labour. Self-sufficiency is an unsustainable policy though it could be practiced in limited areas under special circumstances. On the other hand as a developing country trying to build its own industries and develop its own agricultural production it needs certain safeguards against the penetration of foreign goods into the local market.
Because of the low Savings ratio Sri Lanka lacks adequate capital for investment which compels us to depend on foreign capital. Further we have been unable to draw in foreign direct investments in sufficient quantities and had to borrow foreign capital at commercial rates. This has aggravated the foreign debt and debt servicing takes over 25 percent of export earnings, most of which is earned by the poorest of the poor in our society - domestic slaves in the Middle East and the plantation proletariat. Further our foreign debt to GDP Stands around 60 percent. The meagre and progressively diminishing State revenue also comes mostly from the masses (around 80 %) and not from the rich and the filthy rich that are lightly taxed or not taxed at all.
In the meantime, Sri Lanka has to depend mainly on export revenue as the local market is quite limited. However low productivity of labour makes our goods costly and hence less competitive in the world market. Thus we lose in the world market due to unequal exchange. This makes the development of technology an imperative for our development. Unfortunately we do not spend enough on Research and Development as well as on innovation. Besides we do not possess state of art laboratories for such research.
All these problems call upon policy planners and economists to think out of the box and define a path of economic development that best fits our needs. Production for export without finding a means of bridging the technology gap at least in a selected key industries and services will not be of much use in freeing ourselves from the debt trap. On the other hand the mandatory debt servicing saps our resources. The increase of the debt/GDP ratio would sooner or later land us in a situation similar to Greece and it would be too late to think of remedies. The donors including the international financial agencies would dictate terms that our people would be unable to agree.
That is why the present government has a do or die task of improving production in the country, generate employment and create wealth. Unless this could be done only a miracle could save it when it has to go before the people.
As far as the donors are also concerned they will not have a friendly government in place that could guarantee their investments unless they help out the present government. Hence the consensual government should seize this opportunity of guaranteeing enough investment for development through selective investment promotion that guarantees sure short and medium term returns unlike showcase projects of the former government. An important measure in improving the investment funds is to propose a moratorium on debt servicing at least for a period of five years and negotiate a revised re-payment option at the end of the moratorium period. In the aftermath of the tsunami the donors agreed to such a moratorium. Experience would have already told the donors that such a moratorium and a revised schedule for debt-servicing is still possible and would be in the interest of both parties. Otherwise it would lead to a situation of debt default. It would give Sri Lanka a breathing space to put its economy in order and embark on a path of fast development without heaping unbearable austerity on the masses who are already finding it difficult to make ends meet, especially with the floating Rupee and the spiralling cost of living. (Part 2 will appear next week)
Since 1977 our economy the guiding principle of our economy has been that of neo-liberalism. Commonly known as the open economy doors were wide pen for investors to come and almost all trade and foreign exchange controls were relaxed. This was in line with the conditions stipulated by international financial organizations such as the IMF and the WTO. Despite reservations about the pro-imperialist bias of these organizations and their hostility to the interests of the developing countries Sri Lanka acquiesced to their proposals willingly.
In 1977 the introduction of the open economy had a devastating effect on the masses. It was done at such a haste that even bourgeois economists considered it too rapid. The living standards of the masses fell and the resulting mass agitation was suppressed ruthlessly. Now after 37 years of the open economy majority of the population still have only a hand to mouth existence. Despite statistics to the contrary prosperity is not visible in vast areas of the country. Even cities that have sprung up with modern facilities and high rise buildings show only the opulence of a few.
The policy makers were also conscious of this weakness of the economic policy. That is why there was a talk of an open economy with a human face and complaints that the benefits of development have not trickled down to the masses. However, the human face did not appear and we are still watching out for it.
There is an urgent need for the country to map out its economic strategy for otherwise it would be aimlessly wandering hither and thither. We must also understand that no strategy has an ever-lasting validity and the strategy should be consonant with the development stage of the economy.
The first premise we have to accept is that at the present stage it is a mixed economy that suits us best. That means the private and state sectors of the economy would exist side by side. Hence calls for the State to withdraw from business is counter-productive. Of course, the State should be selective in its economic undertakings and mostly safeguard the country’s and people’s strategic interests. That is why it cannot allow the private sector with its private individual interests to dominate vital areas of the economy. On the other hand, there is no rationale to kill the entrepreneurship of the private sector by the State entering into economic spheres that could be safely carried out by the private sector.
Nor should one be carried out by the false logic that the State sector is less efficient than the public sector. It is a question of management. We have instances where the State sector performs better than the private sector and vice versa too. For example, the State health sector is more efficient and qualitatively higher than the private health sector. A similar situation exists in the transport sector too. However it is the opposite in trade.
In deciding upon the economic strategy one should be mindful of the global economic and political situation too. To prescribe neo-liberal solutions at a time when it is on the decline in the world arena would be a retrograde measure. The global financial crisis that erupted in 2008 demonstrated the limitations and drawbacks of the neo-liberal strategy. It is those countries that opted for selective acceptance of the global prescriptions and chartered somewhat independent paths that withstood the adverse effects of that crisis. Moreover, the world centre of production is shifting to the East, to Asia. China and India together with Russia, Brazil and South Africa form a powerful emerging economic base called BRICS. Western dominance in the world economy would decline during the second half of the present Century, if not earlier though it would continue to be powerful for some time more. Yet booking a permanent berth in the Western bandwagon is a risky affair.
However, since our main economic partners are the Western powers we have to have a long term strategy of diversifying our international economic relations to our advantage. South- South cooperation as well as regional integration should be looked upon as means of developing an independent economy visa-a-vis our traditional partners.
The bane of so far implemented economic strategies have been that they were partial towards the haves. They have marginalized the have nots. They were strategies that prescribed development sans equity. The under-privileged and the unemployed as well as the bulk of the working population did not benefit from those strategies. They have only developed a middle class and marginalized the poor more. The gap between the haves and the have nots has widened. As statistics amply demonstrate the richest 10 percent of the population receives 38 percent of the national income while the lowest 10 percent receives only 1.5 percent. This is the result of almost 37 years of the open economy. Need we say anything more to show its impotency?
If worsening of the plight of the poor is a concomitant of economic development and if social polarization aggravates as a result of wealth and poverty being concentrated at opposite poles it is bound to produce social upheavals and instability. Even the meagre development achieved would be at risk. Hence there should be a balance between economic development and social equity.
Development that had taken place since independence has been skewed. Bulk of the development was in the Western province and the entire hinterland was a barren desert with no productive employment of the population except in the traditional farming, fisheries and plantation sectors. If benefits of development are to trickle down to the poor there should be equitable distribution of industries and agricultural development throughout the regions.
All countries that had developed relatively fast had spent liberally on human capital development and social infrastructure. Unfortunately this has been a sphere neglected in Sri Lanka. Though efforts have been taken to invite the private sector to venture into these areas all efforts have been a dismal failure. Even when some of them have ventured the quality of their output has been poor. Much needs to be done to develop a research and innovation culture as stated last week. Since capital is scarce private and State resources could be pooled for joint ventures in this field.
Even today there is no genuine effort to enlist the working people as legitimate partners in economic development though they form the most vital element of production. The value of a contended work force is not properly understood.
The working people, on the other hand, has lost their bargaining power on account of their political and ethnic divisions. In this context the employers are coming forward with various proposals for labour market flexibility. In demanding more freedom to hire and fire workers they are pressing for revision of gratuity payments and termination of employment conditions. Already the strength of working class trade union action has been weakened by the employment of contract labour with less rights and the practice of sub-letting production units to disperse the concentration of working people. Those who bow before them at election time hardly seem to recognize them once in power.
What is reuired today is an economic strategy that would assure an independent development while participating in the international diviion of labour productively.