Root cause of all problems
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Like this free-flowing waterfall, Sri Lanka's economy should be more 'open' and the rule of law established.
There is an old saying – “All garbage goes to Beira Lake”. It is self-explanatory; Beira Lake in Colombo was the recipient of all sorts of garbage in the city – at least those days. In the same way, the country’s “open economy” has been the recipient of all the blame. Accordingly, all sorts of economic and social problems that we face today are due to the “open economy” of the country!
People are greedy for money because of the open economy; corruption and bribery is rampant because of the open economy; crime and robbery is widespread because of the open economy; law and order is jeopardised because of the open economy; humanity has vanished because of the open economy!
The most recent articulation I heard was that even the COVID-19 pandemic hit us because of the open economy. I am sure we can build up a logical argument to reason out that too. When the Coronavirus didn’t originate from Sri Lanka, surely it has come from somewhere else through somebody or something that originated from abroad because we are “open” to other countries!
Surprising question
A few weeks ago, I accepted an invitation to deliver a speech at a webinar organised jointly by the Association of Sri Lankan Academics in Japan and the Association of Sri Lankan Students in Japan. Interestingly, the title of the speech that was suggested by the organisers was “Should Sri Lanka still be an open economy?”
What a question to ask after spending more than 40 years with such an open economy!
A renowned economist from Australia, who is a friend of mine too, sent me his shocking remarks in an email after hearing the title of the speech: “I was surprised that someone had to raise this question whether Sri Lanka should remain an open economy in this era of economic globalisation! In fact, a more sensible title would have been ‘Why Sri Lanka should remain an open economy?’”
I wrote back to him: “It has been a ‘live’ question and, it is more live today than ever before”.
I had reasons to say that too. In an email communication with me, another friend of mine had written the following: “…Sri Lanka’s woes about its devastating economic crisis that has been ravaging the everyday lives of the people are a consequence of liberalising trade and capital flows over four decades ago. Its dependence on imports, and looming external debt payments, both without adequate foreign earnings, has pushed the economy over the cliff into a depression.”
In fact, it’s a correct statement about Sri Lanka’s current economic woes; I don’t dispute that. But the question is whether it is a result of the “open economy” resulting in liberalisation of trade and capital flows; in fact, performance of both trade and capital flows particularly during the past 20 years remained lagging far short of expectations.
Realities and Rhetoric
Therefore, I suggested to add another clause to the proposed title of the speech: “Realities and Rhetoric”. I knew there was a difference between realities and rhetoric of the “open economy” of Sri Lanka so that finally, I delivered the speech specifying on realities and rhetoric of the open economy of Sri Lanka.
It is the same question that I want to raise today: “Is Sri Lanka an open economy?” In order to answer the question, we must first know: “What is an open economy?”
An “open economy” means an economic system where people are free to make their economic choices in the markets governed by the rule of law. Therefore, it is a market economy which has a foundation – the rule of law. It is not a system without rules and regulations; that is anarchy! We don’t call the ‘open economy’ an anarchic system, but rather the opposite.
Then we have a question. If it is a system with rules and regulations, how does an open economy differ from a regulated economy? It is the “quality” of rules and regulations which allow you to exercise your free choices without letting anyone else to infringe your right. That’s exactly why the “rule of law” is fundamental to the open economy. According to this principle, rules and regulations should be “enforced and impartial” so that actually they facilitate your free choices without leaving room for someone else to infringe your rights.
Traffic lights
Let me get the famous traffic light example in which red, green and amber lights indicate the rules that the drivers should follow. Everyone is free to drive through, but driving must be according to the traffic light rule.
At a busy junction without traffic lights, you can clearly see an anarchy in which everyone is infringing others’ right. Even if there are traffic lights, someone could use “powers” to cut across disregarding traffic lights, and hence, infringing others’ rights; in this case, even though there is a law, there is no rule of law.
Sri Lanka provides an ideal case of a poor record in two areas important for the open economy; legal system and international trade. The evidence can be found in the latest annual report on Economic Freedom of the World 2020, published by the Fraser Institute, using 2018 data. The maintenance of the rule of law is represented by the indicators of judicial independence, impartial courts, military interference in rule of law and politics, integrity of the legal system and the reliability of the police. It is amazing that in all these indicators, Sri Lanka has continued to score poorly.
It is true that, Sri Lanka opened up its economy in 1977, but it does not mean that Sri Lanka had an “open economy”. This is because establishing an open economy requires reforms in the foundation, while the rule of law was one of the important areas of this very foundation of an open economy.
Open without trade?
Without any difficulty, it is easy to understand the relevance of “international trade” to the open economy. There is no open economy without opening for international trade. Therefore, open for trade cannot be hidden underneath like the rule of law as a foundational stone. In fact, it may be hilarious to talk about an open economy without opening for trade.
Sri Lanka’s position in international trade is an exceptional case because of not only its poor positioning, but also its historical deterioration over the past many years. International trade positioning is poor due to poor scores of tariffs, regulatory trade barriers, and the controls of the movements of capital and people.
Sri Lanka’s positioning with respect to international trade appears to have got eroded against many of its peers, including China, India, Thailand and Bangladesh; further the countries such as Myanmar and Vietnam appear to have improved their positioning against Sri Lanka with respect to being open to international trade.
Ignoring all lights
Direction is more important than positioning; Even if the positioning with respect to either rule of law or international trade or any other area is poor, consistent improvements in such areas shows the “direction” which is important to protect the rights for economic choices from infringement. A clear direction of the improvements of the quality of rules and regulations improves their consistency and predictability. From an investment point of view, the clear direction of improving rules and regulations could be regarded as more important than ad hoc ups-and-downs in a current positioning.
It difficult to designate Sri Lanka as an open economy. It started reforms by liberalising trade and investment, but it was a fragmented and incomplete agenda. It is a system with traffic lights, but sometimes you are directed to drive on red lights or asked to stop at green lights; and suddenly you could notice somebody else driving on the wrong side ignoring all lights and surpassing all others. When the quality of rules and regulations are poor, there is room for trespassing the boundary lines and infringing into others’ rights. In this context it’s not surprising that an economy as such performs poorly. (The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).