Where have all the economists gone?

Despite the state of the economy, the policies pursued makes one wonder whether economists are proffering any advice on how the economy should be managed. Are they like an audience of a Greek tragedy, merely watching the inevitable disaster unfolding?There are several possible ways economists are acting. One is that economists, like all others in this island, are concerned about themselves in many different ways. They perhaps do not want to be a target like journalists have been. Therefore public criticism of economic policies is muted. Economists working in public institutions, who are expected to give the government advice on the economy from time to time, appear to have become silent too, even though much of this advice could be given confidentially and should not cause the economists or the government any concern. Whether such advice is being given or not, we do not know. If such advice is in fact given then either this advice is not good hard economic advice or their advice is not heeded. There is good reason to think both are happening.

Some very proficient economists in the highest places do not give the advice that they should give, as they have realised that it is in their own personal interests to articulate what the politicians like to hear. They have learned that were they to give advice on the basis of economic principles and the realities of the emerging economic situation, they would not be heeded. In fact their survival in eminent positions would be at risk. In such a situation it is in their own self interest to either say little or not to acquaint the government with the impending economic crisis. This means policy options that are available to at least manage the economy in a manner that would lessen the problems is not forthcoming. They may be suggesting ways and means of temporarily facing the problems, such as by continuing to borrow heavily from abroad.

There is an inherent reason as well why this situation develops when an economic crisis is brewing. Good economic advice, particularly in a deteriorating economic situation, is politically unpalatable. One can liken it to the role of a medical doctor who has to prescribe drugs that are difficult to take. When the prognosis is bad, the medicines are bitter and difficult to take. They may rationalise that since their advice will not be taken, why court unpopularity and risk their own careers. Deep surgery is what would be needed ultimately.

Economists in high places and close to the powers that be have become defenders of the government rather than economic advisors. In such a situation, neither the persons nor the institutions set up for guiding governments are playing any role in correcting government policies. The Economic Advisory Committee, a sort of counterpart of the US Council of Economic Advisors, has turned silent listeners at Temple Trees rather than advisors and critics of the government. It is not a body that explains the steps that the government must take to correct the deteriorating situation. Those who recognize the reality of the situation and know the remedial actions that require to be taken are conspicuous by their silence. The few who speak echo either the sentiments of the politicians or are moribund in their thinking. Those who speak say things that are sweet music to the ears of the government. In any case there is no action taken on the advice of this distinguished body of economists and policy makers. The economy is floundering without any heed to fundamental economic principles.

How can one explain the expectations of the government in this context? Several explanations are possible. One is that the government has placed all its eggs in the war basket. A victory in the war it is assumed would give the government such popularity that it could win an election and return to power with a massive majority. Let us agree that this would be the case. This scenario is a political one that has little connection with the economy. The government may win the war but that will not resolve the immense economic problems that are growing into unmanageable proportions. The answer to that may well be that once the war is won and peace restored the economy will automatically revive, with tourism booming, flows of foreign investment and the improvement of the business environment for domestic investment as well. The economy that is now functioning with a couple of its pistons not firing will once again accelerate with all its engine firing. We certainly hope that this scenario would materialise.

Apart from the “IF” element, in this scenario, the expectation of a sudden recovery in the economy after dipping into a crisis situation is too much to expect. The problems of public debt with a high component of foreign debt repayments, high inflation and high fiscal deficits have to be tackled. The stark reality is that when fighting an expensive war, good economic governance becomes a sine qua non. That is the issue that has not been recognised. Consequently when the war is over, the depth of economic problems would be of such a magnitude that economic recovery could be a Herculean task.

The other expectation is that some of the unfavourable developments of the economy would be offset by favourable factors. This applies particularly in respect to the huge trade deficit of perhaps over US$ 6000 million that is developing and the consequent balance of payments problem. The hoped for favourable factors are an increase in remittances, capital inflows, and increased earnings from tea and rubber. Then there would be continuous borrowings that would ease the balance of payments. There are problems in all these expectations. There is no doubt that remittances would increase. However, the increases in remittance are not likely to be of a magnitude that would offset the increases in imports, especially with all prices rising at the rate we are currently witnessing. Some energy experts predict that it would rise to US$ 200 per barrel. Capital inflows for portfolio investment and foreign direct investment are not likely to be significant. In fact capital inflows may diminish owing to the deteriorating economic conditions, especially the high rate of inflation and high rates of interest. The increase in earnings from tea and rubber are hardly to be of consequence when the increases in industrial exports are rather modest. Further foreign borrowing could postpone the deterioration in our external account, but the immediate solution would increase foreign debt and debt servicing costs that are already high and increasing. Enhanced foreign borrowing is a palliative that can in fact get the economy into a serious debt trap.

There is no doubt that the government is facing a serious economic situation. The solutions to the economic problem are not easy. Not to recognise it is the surest means of getting further into the mire. Sound economic advice is needed to alleviate the economic conditions that are fast deteriorating. In this situation where good economic advice is vital, where have all the economists gone? They have gone silent.