The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Mixed economy or mixed-up muddled economics
The concept of a mixed economy has wide consensus. It connotes balance, social justice, fairness, equity and an avoidance of extremes in economic policy. It is particularly attractive to a community that has been brought up in the ethics of a middle path and an economic and social history of welfare.

While the concept of a mixed economy has these attributes, the current espousal lacks definition and clarity. In a sense all economies are mixed economies, even that of the United States, as there are important areas of economic and social activity that remain in the hands of the state.

Agricultural research, education, regulatory organisations and defence are some examples. Economies, where the commanding heights are in the hands of the state are also described as a mixed economy, as they too have areas, such as agriculture and informal enterprises in industry and services privately operated.

The phrase "Mixed Economy" therefore requires definition. Perhaps all parties in the political fray are for a "mixed economy". Therefore the important issue is the precise nature of this mixed economy they espouse.

The UPFA (Sandhanaya) claims that its policies are for the establishment of a mixed economy. None can object to that. The moot point is what is this mixed economy? Is it the intention of the Sandhanaya to once again gain control of the commanding heights of the economy? Will the estates be nationalised once again? Will there be a collectivisation of small farm agriculture? Will the state take over key industries and manage them? Will private health and education be discontinued?

These are among the key questions that require to be answered to add substance to the concept of a mixed economy. The mixed economy must be defined in terms of the areas of economic activity that will be in the hands of the state and in the private sector.

In what areas of economic activity and social programmes would the state and private sector operate in competition? In such instances of competition between the state run and private enterprises, would they operate on the same rules and regulations? Will there be an even playing field for both?

Vitally important in economic policies of a government are an internal consistency and a capacity to inspire confidence among domestic and foreign entrepreneurs and investors and the donor community. A mixed economy should not be one that is based on mixed up ideas of economic policy lacking consistency.

The need to have the confidence and acceptance of foreigners in our economic policies is a stark reality that cannot be wished away. Equally important is a need to work within the framework of policies of international and multilateral agencies, such as the International Monetary Fund (IMF), the World Bank, The World Trade Organisation (WTO) and UN agencies.

Sri Lanka's economy is foreign dependent, not only in terms of trade, but foreign investment and aid. The fact that nearly half our public debt is foreign, that our trade dependence is around 70 per cent of GDP and capital expenditures in the budget are from foreign funding are evidence of this dependency.

Further, foreign investment is vital in the context of inadequate domestic savings, low efficiency of capital and the precarious state of public finances. These factors imply that the framework of economic policies would require being acceptable to the international community.

This does not mean a blind acceptance of policies dictated by outsiders. In many instances there is some room for manoeuvre and adjustment. Yet the broad framework of policies should be within the confines of the tenants of these agencies. We cannot afford to be an international pariah. We cannot afford to be another Cuba. Economic policies have to be realistic and practical within an international order that is no doubt dictated by the interests and philosophies of the developed world.

Another important issue in mixed economic policies, is the need for internal consistency. There have often been capricious state interventions in the name of mixed economic policies and in the public interest, both in Sri Lanka and many other developing countries.

Unless economic policies are clearly defined, we may end up following mixed up economic policies that could lead to a messed up economy. The utterances of several political parties indicate a muddle and confusion in economic thinking. Combining liberal trade policies, with control of imports of commodities that are locally produced illustrate this.

The tendency to control key areas in the economy must be eschewed in the light of the country's past experience of inefficient management of state enterprises and the huge losses sustained by them that have been a burden to the people at large.

The nationalisation of the estates is a clear example of numerous such instances. The productive capacity of the economy is consequently reduced, while at the same time the losses become a burden on the unsuspecting public. Even in the current situation of a much-reduced public sector, the losses incurred by state enterprises are huge.

The plea that in the future public enterprises would be well managed is a hollow promise, as the same factors that resulted in the losses would continue. The appeal of a mixed economy has been enhanced by the manner in which the UNF government has handled a number of economic issues and the dimming of the public memory of economic policies pre-1977.

The lurking danger lies in half-baked muddled economics and capricious economic interventions that could set the clock back to an era of economic stagnation.

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