Political uncertainty and the economy
The fluctuations in the stock market are symptomatic of the political uncertainties gripping the country. These uncertainties are leading to speculation about what may happen in the near future. And these conjectures among the business community, as among the general public, are assorted. There are different responses by investors to the unfolding events, but overall business confidence is shaky.

The biggest uncertainty was on when the Presidential election would be held. The decision on Friday has resolved this issue, but other uncertainties remain. Then there is the uncertainty as to whether a general election would be held this year. Statements that neither a general election nor a Presidential election would be held this year lacks credibility. In fact some interpret this statement to mean just the opposite.

They think that a general election would be held ahead of a Presidential election. Then there is the question as to whether the elections would result in a stable government. There is doubt that any single party would be returned to power with a majority in parliament.

There is also no certainty that we would have a party or coalition with majority control in Parliament holding the post of executive President. If these were to be of two different parties or coalitions then the problems we had in recent years are likely to make the system unworkable. Further a coalition with diametrically opposite policies on the economy can create an impasse in economic affairs.

The implication of all these uncertainties is that the economy and the welfare of people are at stake. The improbability of a stable and effective government means that the economy would perform at much lower levels than its potential.

The blatant fact is that we have a constitutional set up, a political system and a political culture that make stable and effective government impossible. Unless this basic problem is resolved an economic take-off is impossible to achieve. Only a large measure of political consensus can achieve a change in the constitution. There are good grounds for scepticism that this could be achieved.

Economists have explained the country's post-independent economic performance in terms of internal and external shocks. Periods of low economic growth have been identified as ones that faced either internal or external shocks or both. Internal shocks have been natural disasters, droughts and floods, insurgencies, civil disturbances and terrorism. External shocks have included oil price hikes and declining terms of trade. The Central Bank's Fifty -Fifth-Anniversary Lecture last Thursday that advanced this proposition also identified state controlled periods of the economy as ones of low growth. We may add another dimension to this analysis. Periods of political uncertainty have dragged down economic growth.

This political uncertainty is even more than what we discussed earlier. It is not an issue of whether one party or another is in power, but the prospect of governments unable to implement economic reforms, take measures for long term growth, adopting policies to placate the masses irrespective of their repercussions, are among adverse economic policies that could cripple economic performance. What we are experiencing today is a lame duck regime within a framework of both internal and external shocks. Worse still there are doubts that these deficiencies in the political economy would be resolved soon.

A counter view is that despite all these setbacks and disadvantages the economy is performing reasonably well. Agricultural production is positive and the country has achieved self-sufficiency in rice. Industrial production and exports are increasing, there is a growing diversification of exports and garment exports have weathered the removal of the Multifibre Agreement well with garment exports rising this year. Despite the fluctuation in the market, the Colombo Stock Market has been buoyant with the All Share Price Index passing the 2000 index points mark and market capitalising increasing sharply this year. With such a performance should one be despondent about the political uncertainty?

These growth indicators are positive achievements in this political context and denote a degree of resilience of the economy in spite of political uncertainties. Such achievements are possible owing to their being mostly independent of the political scenario at the moment. Where the political developments hurt are in terms of reforms, structural changes, and bold policy measures that are needed to place the economy at a higher level of productivity and efficiency.

Unless the country takes a leap in developing infrastructure, ensuring political stability and provides a healthy macro-economic environment, Sri Lanka will continue to lag below the performance levels of other developing countries. The inability to perform to our economic potential is the tragedy of our times. Therein lies the need to get the political equation conducive for correct long-term economic decision making to enable sustained rapid economic growth.

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