Economy without Tiger agenda

By Susantha Goonatilake

I believe that any person with some modicum of intelligence could coordinate and manage the economy better than President Kumaratunga's government. The new government was greeted by a rise in the stock market, which is a barometer of expectations rather than performance. But our stock market does not reflect the economy although it could be seen as an indicator. Only a small part of our economy is traded in the stock market.

Contrary to simplistic labelling, we were never a completely closed economy. Nor are we today completely open. Our import substitution phase, (closed economy) followed by a more open export-oriented phase, (open economy) has its parallels in countries such as Korea, India and China. In fact these countries opened up during the same time that Sri Lanka did-in 1977.

The stock market's daily turnover these days is around Rs. 100 million or in the one million dollar range. Internationally speaking, this is peanuts. 

There was a period during which the stock market boomed in 1993 and 1994 and was featured once in the New York Times as an "emerging, market". This was partly because of the spillover effect of the massive Western investment splurge in Asia. Although a large part of this investment went to East and South East Asia, some of it spilled over to us. What we got for a short time was in the region of millions of dollars, small change compared to the tens of billions of dollars being annually invested in China. But this had a great effect on our tiny stock market. Sri Lanka is not the only country going into negative growth this year, the first time since Independence. Singapore — the economic role model for many in the UNP — too is going through a similar crisis.

And of course, several Western economies are suffering economic problems due to the combined effects of a global downturn and the September 11 attacks. Here the downturn has been due to these twin factors together with the devastating LTTE attack on the BIA in July last year. 

The government is just a month old but there are indicators to judge the direction of the economy.

J.R. Jayewardene opened up with the memorable phrase, "let the robber barons come". He also introduced a harsh labour culture sacking tens of thousands of workers during a general strike spearheaded by the NSSP. He dismantled state protection in key industries like handlooms. This was just the opposite of what was happening then in India — "Be Indian, buy Indian." But still investment, both through aid and private sources, came and the economy did grow.

A first indicator of Prime Minister Ranil Wickremesinghe's external economic orientation was his commitment in Delhi that India and Sri Lanka would stand together regarding the WTO. India has been in the forefront in the campaign against the WTO which is by and large a Western prescription for the developing world. The WTO in effect also eliminated the role of pro-Third World institutions like UNCTAD. Mr. Wickremesinghe's Delhi stand could be a reversal of JR's robber baron philosophy, a sign of a changed UNP (or of a UNP agreeing to matters that they do not understand).

Ravi Karunanayake appears honest and dynamic, pushing actively for keeping the CWE opened for 24 hours.

A key to investor promotion is having a steady power supply. Power and Energy Minister Karu Jayasuriya and his team comprising the Ministry Secretary, the CEB Chairman and national energy advisors appear to be honest and hard working. The 180-day target could be kept not because of new plants but largely because existing plants, including recently commissioned and non-operative ones, being brought to full steam. Yet questions remain.

One simple rule, the quicker you want new power sources, the more expensive it is. So quick energy fixes invariably drive up prices. That is, if instead of coal you want the quicker diesel or gas turbines, the cost to the consumer would be higher. Due to high costs, the ability of the CEB to invest in the expansion of the system and give reliable supplies at an affordable cost will be curtailed.

A principal reason for future high costs and delayed electricity is the Church's role in preventing the construction of the coal power plant, a necessity for any power strategy. The Church seems to be driving us to a new dark ages. 

One of the arguments being made by the anti-Norochcholai lobby is that the nearby cement plant spews dust and that the coal plant would be worse. But this is disingenuous. Dust extraction is a well-known and widely practised technology and there are coal power plants in the environs of the Vatican. The cement plant spews dust because of breakdown of maintenance; the result of policies that rid the then Cement Corporation of carefully trained personnel.

A key to economic growth is also the efficient functioning of financial institutions, especially the dominant state institutions. The chasing away of the new People's Bank restructuring staff by the JSS has aroused a debate. The JSS insists that these new recruits are redundant; an analysis endorsed by the two non-political unions — the CBEU and the Executives' Officers Association. The JSS has had an unsavoury past in the country generally. But its moves are significant as it comes from a UNP wedded to the private sector and allegedly to meritocracy. The situation seems more complex.

The new private sector recruits had helped run much smaller establishments and were now being paid five to ten times the salaries of top People's Bank officials. The payment of expatriate salaries to local staff raises key questions in a country with one million persons working abroad and getting foreign salaries. Will the one million expatriate be paid such high salaries once they return?

The restructuring team was expected to change the fortunes of the bank straddled by politically induced loans. Yet, their actual "decisions" were largely the transmission of advice they had obtained from their much lower paid parallels. And after one year of such activity (including it is said abuse of privileges), the new bank experts had little to show.

There are inherent contradictions in this government as with the last. A key example is its delivery machine, the cabinet. Its large size and built-in areas of overlap seem to be a textbook example of how not to draw an organization chart. That is how to clog up the delivery. One month on, the government is feeling its way around the one area — the economy — where it has a clear advantage over the last.

Peace and President: new Govt.'s tight-rope walk

By Victor Ivan 

The political picture of the country is extremely complex. Although the UNP has been able to win the election and take over the internal administration to a considerable extent, the executive power is still in the hands of the PA. Although the President did not enter into a quarrel with the winning party immediately and has taken action to hand over the Defence Ministry, she has not transferred all the activities of internal administration and become a nominal President. She has retained for herself the right to appoint personel prominent positions. She is using her power to appoint the Inspector General of Police, the Commanders of the armed forces, the governors and the Ambassadors. She has not handed over all the institutions that come under the ministries and seeks to keep and control selected institutions.

When the opposing party came to power, the presidential secretariat should have contracted proportionately, but, on the contrary, there is a speedy expansion. Some of those who lost their jobs with the triumph of the UNF and who are among her trusted colleagues are being absorbed into the presidential secretariat. The President has also started a massive media unit of her own. A large number of the vehicles which had been held by state institutions appear now to be attached to the presidential secretariat.

Although the President has surrendered a large extent of internal powers of administration, she seems to have followed a policy of keeping for herself the decisive elements of state power. When she had parliamentary power, she took hold of positions like Chief Justice, IGP and Army Commander. Although the present victorious ruling party would like to remove them from those positions which have a symbolic significance, the new government is facing the problem of how to remove them without the President's consent. A factor that disheartens the people is that, although they had defeated a government, persons in positions of symbolic importance, whom they resent, have not changed. The President's strategy seems to be to keep them in a position in which they cannot join the government and to use them at a time of crisis for a programme of destabilising the government.

Although it is Parliament which has the power to control the treasury, the President's Fund has enough funds to hold on until the coming of a crisis. It is the largest fund existing in the country apart from the treasury, and no one knows the exact balance. On the other hand the President has a special security division armed with ultra modern weaponry and the number of defence personnel in it, is not less than four thousand.

The Prime Minister thinks that in the search for a solution to the ethnic problem, it is necessary to keep the main opposition in a position of non-obstruction, and seems to think that he must be satisfied with what he has got and must function in collaboration with the President. That is what the President herself wants. She signals to the victorious party that, if it wants her co-operation it must be satisfied with what it has got and must make no attempt to curtail her powers. However, the Prime Minister has to do business not with an opposition which has been ousted from governmental power but with one which holds in its hands very vital elements of state power. The UNP did not have such power while it was in the opposition. The President, on the one hand while showing that she would not obstruct any move in search of a solution to the ethnic crisis supports behind the scenes the JVP programme against reaching a peaceful solution. 

The President knows that the search for the ethnic crisis is not an easy or simple one and that moments would inevitably occur which would baffle the people. She would need just one incident which would cause deep resentment in the minds of the armed forces. 

When such an occasion arises she will stand up as a heroine rising up for the honour of the armed forces and the Sinhala people. Such a rise up would push the government to a serious crisis and would weaken the government's popular base and would frustrate the entire peace programme. If the Prime Minister fails to see this serious challenge before him and thinks only about the peaceful co-existence that should be maintained with the President, the day when the new government would be pushed to a massive crisis cannot be very far. It is essential to go on acting in co-operation with the PA as the main opposition for the purpose of reaching a solution to the ethnic crisis. 

At the same time the government must not forget that the PA is not an opposition party entirely outside state power. The political conditions in the country change in accordance with incidents that occur. A co-existence with the President can be meaningful only if the government succeeds in achieving a situation in which her ability to sabotage the government's actions can be completely controlled. For that purpose she must be made powerless, or her powers must be constitutionally controlled .

The writer is the Editor of Ravaya

Politics and economics of prices 

By the Economist

A repeated theme of Sri Lankan politics has been the inability of incumbent governments to keep down prices and promises of the opposition to bring prices down once in power. Often new governments bring down prices in the first weeks and months in office only to find that they increase once again. The reasons behind this phenomenon are many and complex. Let us discuss some of these dispassionately. Take the case of food prices. First of all, in the case of many food commodities, prices are high both due to the higher costs of production in the country and high marketing margins. These in turn have a number of causative factors. Rice is a good example. The cost of production of rice in Sri Lanka is much higher than in most rice producing countries. Consequently the price of imported rice is lower. If, as the Minister of Agriculture has said, he would ban the import of rice, then rice prices would rise further. The conflict between producer's interests and those of the consumer is evident in this case as in many others. Protection of most food prices would raise consumer prices.

Such protection could be a good incentive to increasing rice production though it would increase consumer prices. In such a conflict of interest between producers and consumers, the best option is to use such an incentive for increasing domestic production of rice for a short period.

During this period the country must strengthen its support measures for paddy cultivation, especially credit and extension services to increase yields and thereby bring down the cost of production. The protection afforded to paddy farmers should not be one that will encourage inefficient production and maintain low yields.

Equally important would be the improvement of the marketing of paddy so as to reduce the margin between the price that the paddy producer gets and what the consumer pays. Again a host of factors, such as fuel prices, road conditions, vehicle repair costs, wages and the costs of food prices impact on these margins. Monopolistic control and lack of competition in the purchase of paddy also have an influence in depressing farm gate prices while increasing consumer prices. Many efforts in the past to improve paddy-marketing services have not met with success. This indeed is a difficult problem to solve, but one that must be seriously addressed. A more competitive marketing system rather than efforts for the government to control and administer marketing is the solution.

What we have said about paddy is equally true of several other food crops, such as vegetables, potatoes and fruits. Potato prices are the best illustration of this. Sri Lankan potatoes cost several times the import cost. The government protection of potato imports will further raise the price of potatoes and bring into cultivation marginal and low yielding lands. This would also have the result of sustaining the high price of local potatoes. The other dimension of the problem is in several basic food commodities where local production is small and therefore they have to be imported. Sugar, milk powder and wheat flour are the best examples. 

The prices of these commodities are affected by the exchange rate. Even though the international prices of these commodities have not increased, the domestic prices rise owing to the depreciation of the currency. There are also the increase in shipping costs and the various tariffs and other charges that importers have to pay and these have often increased. This illustrates the fact that overall economic conditions and the fiscal situation have an important bearing on import prices.

A third category of problems arises with respect to utilities. Most utilities are monopolies. They are therefore able to raise prices and pass on their inefficiencies or increase their profits. Electricity and cooking gas are the best examples of these. In the case of gas it appears that the government did not take sufficient steps to protect the consumer. It is a cardinal principle of privatization of utilities that the state prescribes conditions to protect the consumer. Public utilities should also come within the jurisdiction of a Utilities Pricing Commission. However there may be good economic and financial reasons too for the increase in prices.

These are issues that the government must look into. Finally the overall economic conditions and the state of the public finances have an important bearing on the general level of prices. Sri Lanka's case is also one of " too much money chasing too few goods". An improvement in the public finances and increases in productivity, particularly of agriculture, would provide the most lasting solution to the problem of persistent increases in prices.