policies of presidential manifestos
Who will deliver prosperity?
Dr. Sirimal Abeyratne, University of Colombo
The forthcoming poll seems to be a distinguishable one due to the
resurgence of intense political competition to ‘give free’
to the people. In the election manifestos, the promises to ‘give
free’ undermine everything else. Thus much needed long-term
strategies to achieve peace and prosperity are not spelt out clearly.
The UNP, which was not in favour of a ‘giving free’
policy in the history, has also come up with such a programme this
time learning lessons from the past – not only from the recent
past, but also from the ‘old’ past in the early 1950s
and the late 1960s. The then UNP leader, late Mr. Dudley Senanayake
was defeated twice for tampering with the then rice subsidy. And
we elected governments just because they even promised to bring
‘rice from the moon’. Despite the appeal of the UNP
leadership that it needs few years to put the country on track,
the UNP was defeated at the last parliamentary elections in 2003
due to the lack of populist-type policy measures in its election
campaign. The UPFA, which released its manifesto later than the
UNP, had a better chance to put forward even a more populist programme
than the UNP manifesto.
It is a fact that subsidy programmes have never developed a country
and never eliminated poverty, and will never do so in the future.
They can be justified only as ‘temporary measures targeting
the low-income groups’ because they address just the ‘symptoms
of poverty’, but not the ‘cause of poverty’. If
subsidies can solve development problems, Sri Lanka would have developed
long ago and then, today we would have no poverty or unemployment
and, would not have even faced with armed struggles of youth in
the South as well as in the North.
However, given the political reality of the type of democracy that
we enjoy since Independence from Britain, the promissory note on
‘giving free’ policy play a major role in elections.
if you have a long-term vision and mission, coming to power is necessary
to implement it. Election manifestos outline a wide range of populist
subsidy and policy measures such as consumer subsidies, increase
in cash subsidies, minimum fixed prices for farmers and maximum
fixed prices for consumers, agriculture subsidies, old-aged benefits,
salary hikes and public sector employment.
to pay for it?
A usual question that many would raise is that who is paying for
the implementation of all these policy measures, if these are going
to be actually implemented. Even if they are not, we should not
be surprised given the economic reality of the country. We are faced
with fundamental budgetary problems that have been aggravating in
1.There is a growing current account deficit, implying that we need
to borrow not only for public investment but also for our recurrent
spending. This is no less than surviving on loans without worrying
about how to pay it back.
Tax revenue, which stands at around Rs. 300 billion, is not enough
to cover interest payments, salaries and wages and, transfers and
subsidies. Interest payments on accumulated debt, which amounts
to more than the annual GDP, is the largest single current expenditure
item in our budget.
The budgetary problem got worst last year with an increase in our
budget deficit to around 10% of GDP, resulting in money printing
and foreign borrowing. During the past two years, the government
resorted to both printing of new money and issuing dollar bonds
to borrow from abroad. This happened even when government got tsunami-related
foreign aid and, even debt relief cushioning the budgetary problem
as well as the exchange rate problem.
The simple question is how we finance increased spending in the
years to come. Whatever the form of financing, it is a fact that
ultimately people have to pay for it through increased taxes or
get stuck in the debt trap. Our weak tax system does not have a
wide tax base, while ‘taxing according income’ does
not seem to be an important part of taxation. About 85% of tax revenue
comes from indirect taxes, paid by everybody.
With all the above problems, however, there could be a way out.
Given the ground reality, it is difficult to ignore the importance
of subsidies. However, it is necessary to manage the expansionary
budget within minimums during the first 2-3 years with donor assistance,
and at the same time put the economy on track. Higher growth can
facilitate the maintenance of an extensive welfare state beyond
the first 2-3 years, and it may be the price that we need to pay
for getting the economy on track.
higher growth is the answer to many other fundamental problems such
as tax and debt burden as well as the development problems such
poverty and unemployment. We should not forget that the unutilized
foreign aid commitment already amounts to about $ 7-8 billion. This
includes the $ 4.5 billion of the Tokyo donor conference (which
had a budgetary relief component as well), about $ 2 billion as
tsunami-related aid, and other multilateral aid components such
as the World Bank commitment for poverty alleviation programmes.
All these have got delayed considerably. The question is, then,
will the new president be able to receive this massive aid commitment
during his tenure and, to utilize it productively.
The economic vision of both UPFA and UNP is to raise the growth
rate to above 8% - a rate that we experienced only twice (1968 and
1978) in the post-independence history. The economy has been growing
only at about 5 % on average, with domestic savings at 16% and investment
at about 25% of GDP. Fast growing economies in Asia are having about
25-30% savings rate and 35-40% investment rate, while foreign capital
plays a major role in bridging the savings gaps.
agriculture has a very limited role to play in accelerating economic
growth and, it will never be able to raise our income adequately
and solve unemployment problem. Whatever assistance you give to
domestic agriculture, under the present conditions of domestic agriculture,
our farmers will never be able to raise their living standards significantly,
unless some of their family members find non-agriculture jobs. In
Sri Lanka, 35% of work force is in agriculture contributing only
18% of GDP.
fact, more and more people in rural agriculture should have the
opportunities to leave it (which actually happens with education),
allowing a lower percentage of the workforce to produce more with
increased productivity. This will make both – the one who
decides to remain in agriculture and the one who decides to leave
it – better off. Then farmers do not need either fertilizer
subsidies or the fixed paddy price, which actually nail them to
the less-rewarding rural agriculture. With all subsidies and government
assistance, including the tank rehabilitation programmes, the agriculture
production which may rise by a certain small percentage does not
put the economy on a dynamic growth path.
It is clear that our domestic savings cannot be doubled in the medium
term, so that Sri Lanka’s effort in achieving rapid growth
foreign investment together with domestic private investment should
play the major role. This requires an establishment of an investment-friendly
policy and political climate, which has got deteriorated during
past few years even without the war.
In fact, Sri Lanka seems to be losing the ground for achieving its
potential economic growth and development. The World Bank’s
‘Doing Business’ Report 2005 highlighted that in terms
of business-friendly environment, Sri Lanka’s rank is 75 out
of 155 countries surveyed. Furthermore, New Zealand and Singapore
are on the top, while most of our Asian neighbours such as Bangladesh,
Nepal, Pakistan, Malaysia, Thailand, and Maldives all are much ahead
of Sri Lanka. World Investment Report 2005 published by the UNCTAD
stated Sri Lanka as one of the least attractive countries in Asia
for foreign direct investment.
to the Global Competitiveness Report 2005 of the World Economic
Forum, Sri Lanka’s competitiveness has deteriorated in 2005
as compared with the previous year and, its rank is 98 out of 107
countries. Fast growth is the ultimate solution to most of our problems
– low income, unemployment, poverty. No country has solved
any of these problems with subsidies, but only with fast growth.
is possible for Sri Lanka to accelerate its growth rate to 8% or
even beyond, as some Asian countries have done it. It requires an
investment-friendly economic policy and peaceful political climate.
Therefore, the last question is that whether our new president will
be able to establish the stable economic policy and political climate
within the next 6 years and sustain it in the long run, to achieve