Financial Times

It does not require a genius to associate oneself with the laundry list of things that are wide off the mark in the country. Yet it would seem not altogether futile to bring into focus one of the most grotesque things about the country – the attitudes that colour and control the management of the nation’s production of wealth.

It is hard not be repulsed by the stubborn refusal of the Treasury – both bureaucrats and their political overlords - to concede the moral superiority of capitalism, when history has made plain that the non-capitalistic ways of managing a nation’s production of wealth can bring down whole cultures and lay them in ignoble ruin.

If it were true that the underlying attitude of the Treasury continues to be marked by a blatant disregard, bordering on contempt, for the expansion of economic liberty, why hasn’t the Treasury learnt from either history or experience?

The answer, at least part of it, is easily found in the role which both foreign aid and the remittances we receive from exporting the poor play in the economy. They make such practices as deficit spending, politicization of monetary policy and the imposition of high taxes and duties possible for the Treasury to indulge in - and to do so without the associated risk of making Sri Lanka another Zimbabwe.

Foreign aid and remittances, economists say, are like taxation without representation, or unearned “incomes”, or lottery winnings. Such “easy money” creates a situation that is not dissimilar to the one created by the abundance of natural resources in politically and intellectually backward societies.

The effect is the same - the strengthening of statist and despotic tendencies.

Thomas Friedman, the author of The World Is Flat, writing in this month’s issue of Foreign Policy, brings into sharp focus the effect of “easy money” on political and economic progress:

“Professional economists have, for a long time, pointed out in general the negative economic and political impacts that an abundance of natural resources can have on a country. This phenomenon has been variously diagnosed as ‘Dutch Disease’ or the ‘resource curse’. Dutch Disease refers to the process of de-industrialization that can result from a sudden natural resource windfall.”

Friedman continues: “The ‘resource curse’ can refer to the same economic phenomenon, as well as, more broadly speaking, the way a dependence on natural resources always skews a country’s politics and investment and educational priorities, so that everything revolves around who controls the oil tap and who gets how much from it – not how to compete, innovate, and produce real products for real markets.”

With remittances from the exported poor expected to exceed US$ 2 billion this year, covering nearly 80% of our trade deficit, it is very unlikely that the Treasury would be impelled to take head on difficult issues like budget deficits, depoliticization of monetary policy, and tax and tariff reforms.

There is nothing to prevent the citizens from being made playthings of either the corrupt or the mediocre with grandiose dreams who imagine that central planning, more than the markets, could cause the wealth of the nation.

In this, the corrupt and the mediocre are amply aided by foreign aid, which buttresses not just economic deficiencies and failures but also the Treasury level hubris and self-deception. For, we must not forget that the donor countries and agencies are too entrenched in cultural relativism to be forthright enough to insist on reform.

Thus, it is difficult to imagine how there could be any loss of the Treasury’s destructive power anytime soon. Taxes and duties will continue to be imposed in increasing rates and in contemptuous disregard for the burden of such an imposition.

The expropriation of the fruits of labour by way of taxes, duties and tariffs will make business even more mercantilistic and less heroic - and tax collection will soon have to be carried out under the pain of imprisonment. The cronies will continue to be favoured with contracts and tax exemptions and more money will be printed.

This was probably what one of the towering economists of the Left, John Kenneth Galbraith meant when he urged, “the state must everywhere step in.”
Clive Crook, writing in the National Journal says of Galbraith who died at the age of 96 on April 29, “Was any American economist of comparable esteem so wrong -- so comfortably and contentedly wrong, and for so many years -- as Galbraith himself? I cannot think of a rival.”

And this from the same article on Galbraith to end our simple musings on the causes of poverty:

“The book he sometimes said was his best was The New Industrial State, published in 1967. Its thesis was that big companies were growing so powerful that consumers no longer had any say. The basic mechanism of supply and demand was broken. Consumers just did as they were told. All power resided with mighty corporations -- such as General Motors. Long before Galbraith died, and probably even at the time he wrote the book, the falsity of this idea was plain. (What would General Motors have had to say these past 20 years about the impotence of consumers?) Galbraith never saw the need to adjust his worldview.”