6th January 2002

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Finding the right economic mix

There is no short cut to economic development. This is something I keep telling the people across many areas in Sri Lanka that I have visited. If we work hard now, we could enjoy some benefits while our next generation will enjoy much more. That should be the vision of our economy.

A visionary in the Premadasa mould but coming from a wealthier background,. Milinda Moragoda, Sri Lanka's new minister of Economic Reforms, Science and Technology, is refreshingly honest ("we won because we were seen as the better of two evils not because the people liked the UNP. It was an anti-PA vote not pro-UN").

Milinda MoragodaMilinda Moragoda

A new set of values, a decent election campaign, an ideas man, uses modest Indian-made cars and plans to give his official BMW to another cabinet colleague. Wears short-sleeved shirts, typical working class office attire. Speaks a lot of sense. "Judge us by our actions - not what we say or promise to do," he says in an interview at his modest private office at Kirulapone. Moragoda, along with Prof. G.L. Peiris, has also been assigned the role of coordinating the peace process.

Excerpts of the interview:

Economic reforms
What is required now is a second generation of reforms, a type of 1977 situation. The 1977 momentum has begun to die down. If we are to focus on a growth-oriented economy, we need another 1997-set of dramatic reforms aimed at accelerating growth.

In a globalised context, we need to find a niche market. In this region, there are two giants, China and India. If we are to look at accelerated growth, we need to treat one or the other as the locomotive based on proximity.

If you look at what happened to Singapore, Hong Kong and the so-called Pacific-rim, those countries were pulled along by China and to some extent Japan.

Sri Lanka is geographically located and at a location where we can become the gateway to the Indian subcontinent. But various factors have prevented us from achieving this like the war, lack of a clear economic vision, a more liberalised, investor-friendly environment and foreign-investor friendly than the other countries in this region.

There is also the issue of mindset. Our business community is, for instance, more comfortable in London or New York than in Delhi or Mumbai. India, as an economic giant in this region, has been moving quickly on economic reforms.

As far as Sri Lanka is concerned, our role as a regional player has been taken away from us by Dubai which has emerged as an investment centre into the Indian subcontinent.

If we are looking for an economic vision, that is the vision we should have - to be the financial centre, the logistics centre, the gateway of the South Asian subcontinent.

We need to have a deep reform process. We have inherited an economy where there is a high budget deficit for various reasons and a widening deficit. According to current trends, the budget deficit would be around 13-14 percent this year which is not sustainable for any economy, let alone ours. There would be pressure on reserves in this situation.

Our state corporations – most of them or all– are bankrupt or losing money. Our defence spending is simply not tenable for an economy of this size. The public sector is larger than it should be and not efficient either. There are other blockages like the financial sector. This sector in any country represents the veins through which the blood flows, not so in the Sri Lankan case.

The education system has serious problems. We are not producing people for the workplace. Unfortunately all these problems are prevalent in a country that has human resources, which succeed abroad. Sri Lankans do well overseas not here.

Given this situation, we need an economy that has to be restructured. There are two ways of doing this. One is what I call the numbers game. We try to reduce the budget deficit from its high level. This is the traditional method but it is not the most efficient.

What we have decided is to look at growth as a focal point and set an agenda for growth. If we grow, we can get the revenues we need and cut the budget deficit. That is not easy as the growth agenda requires a lot of political resolve and short-term restructuring.

That was the decision that was taken – to go for a growth-related agenda and this is also in the context of dealing with multilateral agencies like the IMF, World Bank and the ADB.

Traditionally our economic policies have been donor driven. The donors tell us what should be done instead of us telling the donors – here are our plans, give us your money.

We would like to reverse the process by telling donors these are the reforms we plan to effect and we are going to be aggressive. But in return we don't want you to play this numbers game. We will be trimming the budget deficit, get our revenues right but in a way different from the past.

The priorities for reform – in the first 100 days – would be public sector restructuring like what do we do with loss-incurring corporations or labour market reforms. This is politically a difficult issue. We have to find a compromise between labour and private sector interests. We have to strike a balance between the two sides with the government acting as an umpire.

Financial sector reforms are also critical. The state sector is saddled with a lot of debts making the whole system inefficient. Education reforms are also crucial. Deregulation is necessary. Are we going to resort to an open skies policy in aviation which would be intelligent for a small country and how do we do this?

Inland Revenue, excise, customs - we need to make these departments more efficient. We need a simple tax system that is transparent and one people can understand. We have a huge black economy.

These are some of the reform issues and we are now in the process of sequencing. We will be working out that framework and then talking to international agencies. We are interested in negotiating a poverty reduction and growth facility with the IMF.

But what we want to do is to make it our agenda, not theirs (IMF). Politically it is not easy. These are tough decisions and a large part of it would be our ability to explain to the public that if these reforms are not undertaken, Sri Lanka has no economic future.

You are generally perceived as an urban-based market reformer and out of tune with rural needs. Is that assessment correct?

If you look at my campaign, I speak for five minutes and ask people to ask questions whether in the villages of Avissawella or in the slums of Colombo Central. What I found out was that people in the country are far more intelligent that what the politician thinks. The politician makes promises, breaks them and relate fairy tales.

The people have got played out for the past 50 years. For instance Sri Lanka had a per capita income that was equal to South Korea or Taiwan in the 1950s. Today we have become the basket case of South Asia. We have a tremendous human resource, the only resource needed for development. 

We don't need oil, gold, silver or platinum. We need only human beings. Japan developed with it; Taiwan did the same. Likewise Singapore or South Korea. We have the human resources. We also have a history of success - whether hydraulic engineering or architecture.

But our political culture and system has ruined this country. Politicians have divided this country on ethnic lines, cast lines, political lines and never looked in common to develop the country. What we lacked was that – a common vision.

My belief is that if we are straight with the people, they will accept it. If we are going for cheap popularity - we can do that but this country will be destroyed quickly. We will then never fully realise our potential.

We need to change our political culture. Lee Kuan Yew (former Singapore Prime Minister) used to say he doesn't want to be popular, only respected. Our people are looking for a similar model as they have no faith, no confidence in politicians.

We won this election because we were seen as the better of the two evils (UNP and PA). Not because they liked us more than the other. It is up to us now to win the confidence of the people. In my experience as a politician, the people are intelligent and need to be told the truth.

There is no short cut to economic development. This is something I keep telling the people across many areas in Sri Lanka that I have visited. If we work hard now, we could enjoy some benefits while our next generation will enjoy much more. That should be the vision of our economy. People have got fed up with the system. They see the lives of politicians prospering but their lives, generation after generation deteriorating.

If we are unable to win the confidence of the people, then we as a party have no future and the winners will ultimately be the JVP. The JVP exists because neither of the two main political parties has been able to win the confidence of the people. Both parties have let the youth down.

The people are fed up with the system. If we go around with populist slogans saying we are going to bring down the cost of living, etc, we would fail. We have a huge challenge but to do that we have to communicate and be credible.

On the 100-day programme what reforms are achievable?

We are at the moment sequencing, framing these reforms. We are looking at deregulation of the petroleum sector, ending the state monopoly and un-bundling the Ceylon Petroleum Corporation. In fact a lot of the distribution network, the bowser fleet is in private hands. Then we need to encourage the big players to come here in the petroleum sector – storage, bunkering, etc.

There has to be a competitive climate, a competitive advantage in this sector. For this purpose we are setting up a (petroleum) regulatory authority. One of the things we learnt from the previous government is that the regulatory framework has to be in place. We have to give the consumer the best deal, a range of choices.

The CPC with its losses – totaling Rs. 20 billion – or the CEB for that matter is charging consumers higher than market rates. As far as the CPC is concerned, it would take three years to recover the losses even with the current restructuring of the corporation and the pricing mechanism. We have to look for other ways of paying off these losses but in doing so we tax the economy. These are the realities.

Explaining regularly to the people is the key to good management of the economy. If we increase salaries, the consumer has to pay more for goods and services. That is the nexus - that is the reality and needs to be explained to the people.

The problems that we face are extremely difficult. They can only be solved if we as a society get together. If we continue to play politics we are sunk. We need to be united. That's why the prime minister is repeatedly inviting the opposition to join in a national government formation.

n Power sector reforms? This is one of the biggest challenges faced by the government. The CEB hierarchy needs to look at what sectors have to be privatised, what sectors have to be restructured.

In today's world where private power is an accepted principle, we seem to be nervous about it. Privatisation is not a solution to all the country's problems. Look at Singapore for instance, where the airlines or port are government entities and run efficiently. Our problem is that we are unable to run anything efficiently that is in state hands.

If we cannot restructure corporations or provide services at a fair price to the consumer – without financially burdening these entities – then we need to look at other options.

A macro economic reforms framework …?

The budget will be the first signal in March. Before the budget we will try to bring in as many reform measures as possible. The prime minister himself is coordinating the economy and all of us involved in this exercise work closely with him.

We are working on a matrix of reforms. We are discussing these issues with the donors and preparing a framework and discussing this with the prime minister. He would have to advise and guide us on the sequencing and also the desirability.

We should have this framework ready in the next few weeks. A lot of the reform measures would have an impact on the budget because of the revenue and expenditure side. The budget would be the first major signal of the government's reforms process but prior to that we would be initiating various other reforms.

On peace …

There are no easy solutions. What we have is sincerity. The prime minister has consistently over the past three elections said we need to find a solution to this problem. If there is sincerity on both sides, we can have a dialogue.

We need to convince the people of this country and be credible and prove that this is not again politics. This is the last window of opportunity for this country. The government has said that it would keep the opposition informed of all moves on the peace process and has told Norwegian negotiators to do the same.

If the opposition chooses to play politics, they will destroy the process. We are looking for a new culture in politics and it would be tested for the first time in the peace process.

We have set up a secretariat with experienced diplomats including Bernard Gunatillake in a multi-faceted team on this process. I have requested them to prepare a benchmark study of what has happened from Thimpu (peace talks in 1985 in Bhutan) to now. 

We have no information base. We have had negotiation after negotiation but we don't know what succeeded or failed. In fact we are relying on the Norwegians to know what happened instead of relying on our own source. We want to build a database through this secretariat.

Nobody keeps notes; there is no kind of institutional memory. Negotiations in the past have been highly personalised. What happened during the Premadasa negotiations or the Kumaratunga phase, we don't know.

The LTTE on the other hand have an institutional memory. They are able to pinpoint dates and issues which cropped up over the years. The other problem is implementation. For instance, during the last round of peace talks, Ms. Kumaratunga gave instructions on lifting the embargo but it was not implemented on the ground.

What we need is a very, workmanlike approach - getting down to details and pushing them through.

On science, technology and research …

We are planning to hold a conference, earlier physically but now as a virtual, networking (Internet-based) meeting where we invite Sri Lankans who have some to offer and contribute to the country's development to throw up some ideas.

In research, we are spending too much time reinventing the wheel. If we are doing original research it must have an immediate, practical benefit. There needs to be more private sector input in research.

I plan to do two things in the boards and institutions in my ministry, appointing one-third women and infusing more private sector people into the system so that there would be a blend between the scientists and the private sector. We have some excellent scientists. If we can blend it with private sector blood then we may see some practical things happening.

I would like to see these institutions as incubators for ideas. In the IT sector, the ministry will not interfere, just act as a catalyst and remove the bottlenecks.

How do we make IT relevant to the people? Young people in the village want access to IT, computers, but the digital divide is still large. The government needs to improve IT literacy and make it cheaper to the village.

We would like to collaborate with India on IT. There are a lot of studies done, not only in IT but in various sectors. There are studies on many topics but implementation is poor.

The proposed land bridge - which is a gigantic and ambitious task....?

There are much more ambitious bridges across Asia or Europe. The stretch of water across the Palk Strait is, however, shallow. In today's world, the moment you do this, we become part of a larger subcontinent. 

The whole mindset changes. If you board a train and get to Madras in a few hours, the whole thinking process changes.

Distances and time create a lot of mindset issues. For instance if we had a highway from Colombo to Jaffna 25 years ago, we won't have the problems we are facing today.

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