World-class forums futile without rectifying economic fundamentals
The recently concluded Sri Lanka Economic Forum seems to have brought home the same old message – the path to economic prosperity is not smooth. The country’s economic growth cannot be accelerated without proper housekeeping. Reforms are essential in public finances and other critical areas. The recent experience in Sri Lanka, however, has proved that such reforms are not easy to implement due to their political sensitivity. The lack of a robust reform agenda too is a major policy drawback in the current setup.
To keep expectations low
The Economic Forum, graced by the likes of billionaire investor George Soros and Nobel Laureate economist Joseph Stiglitz in addition to other internationally acclaimed experts may have led to boost the country’s international image and to attract foreign investors. But still such optimistic anticipations cannot be realised without consistent direction of policy reforms which is totally lacking now. Soros who addressed the Forum is reported to have warned that Sri Lanka cannot sit on its laurels and expect gains based on political change. His advice for the authorities is to reduce expectations and to increase performance
Harvard findings not new
Reportedly, the Forum focused on the findings of a preliminary study on Sri Lanka carried out by the Harvard University’s Centre for International Development. It has identified four key areas of risk and opportunity that are believed to be strategic in supporting a sustained and inclusive long-term economic growth for Sri Lanka. They are macroeconomic and fiscal stability, structural transformation and competitiveness, urbaniSation and development and regional development and social inclusion.
These issues are not something new, but diagnosed and analysed by many scholars and practitioners for decades, in the case of Sri Lanka. Also, there are enough in-depth research and policy documents in these areas produced by international organisations like the IMF, World Bank and ADB, to be fair by them. The points raised at the Forum by Harvard Centre’s Director Prof. Ricardo Hausmann on fiscal deficits, lack of export diversification, low productivity in agriculture, urbanisation and tourism too have been extensively discussed in this country at various levels during the last five decades or so without any effective remedial action. So, the country is not short of bright ideas, but short of visionary political leaders who can transform such ideas into action.
New Constitution in the making
Often, political interests override economic priorities, and as a result, the economy is still struggling to take off almost four decades after the economic liberalization. Although the PM had optimistically declared at the Forum that politics is done and the rest of his term would focus on fixing the economy, the lawmakers are just beginning to concentrate on designing a new constitution for the country, rather than paying attention to resolve the severe economic problems. This constitutional process may take months or years sweeping economic priorities under the carpet during such time.
Formulating a new constitution for the country is a subject that has been debated over and over again over the last several decades. The populist handouts and various concessions offered in the recent budget and in the previous ones have not only led to increase the budget deficits, but also to create market distortions restraining economic growth. The expansion of the public sector to the tune of around 1.5 million employees by the successive governments for political gains has had exerted enormous pressures on fiscal management. The reversal of the benefits given to the public sector is unthinkable now as evident in the post-budget agitations relating to salaries, pensions, fertilizer subsidies and concessionary vehicle permits. This is the unpleasant ground reality encountered by the government.
Hostile global economy
Following the US Fed rate hike, the emerging market economies including Sri Lanka are bound to lose the hitherto enjoyed easily accessible, low-cost foreign finance. The less-riskier US security market has begun to attract the capital that came to emerging markets over the last several years seeking higher returns. This will also result in an appreciation of the dollar causing a rise in imports and debt service payments for countries like Sri Lanka. The domino effect of the above along with the world economic setback will worsen the country’s price instability, balance of payments deficit and fiscal imbalance. Soros has warned the authorities to be more cautious about the external volatility as this is just a beginning of a global financial crisis which echoes the 2008 financial crisis.
Government’s role
Stiglitz, being an ardent critic of IMF-style reforms, appears to have confined his deliberations at the Forum to things like comparative advantage, trade with India and China, income inequality, land taxes and tourism. He is also reported to have mentioned that the government in Singapore played a huge role in directing the economy and using markets well. He emphasised that the government should not leave the private sector to act on its own interests. Several years ago, in reviewing Stiglitz’s famous book, “Globalisation and its Discontents”, Sebastian Edwards, University of California professor had this to say, “Stiglitz has too much confidence on the ability of governments to do the right thing, and he exaggerates greatly the extent of market failures.
The agenda should be to improve institutions and incentives; to promote competition and efficiency; to implement policies that raise productivity; to truly help the poor and the destitute; to put an end to corruption and abuse; ….”
I presume this phrase capsulises what needs to be done in Sri Lanka for achieving economic prosperity, however much those policy prescriptions are politically unfavourable to the prevailing government.
(The writer, a former central banker, academic and economist, can be reached at
sscolom@gmail.com)