The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

The mirage of rapid economic growth
The Central Bank has estimated an economic growth of 6.4 per cent for the third quarter of last year, thereby indicating that a growth of 6 per cent may have been achieved in 2005. The rates of growth in the first three quarters were 6, 5.4 and 6.4 per cent, giving an average growth of a little less than 6 per cent for the first three quarters of last year.

The President in his Budget speech said they were aiming at a higher growth of 7 to 8 per cent in 2006 and then to a growth of 10 per cent in the next few years. Such pronouncements of Finance Ministers and Presidents are recurrent though outcomes are different. The need to achieve these higher rates of economic growth and expectations are trite, but efforts to provide the environment and the policy framework for the economy to develop are insufficient.

A host of conditions including political stability and predictability of economic policies are needed to achieve such super rates of economic growth.

It is quite obviously the lack of such conditions that has been the cause of the economy's inability to achieve rapid growth. It is one thing to hope for and envision higher rates of growth; it is quite another thing to achieve them. In the contemporary economic context attaining a growth of around 5 per cent is natural to the economy. As a former Finance Minister, Dr Sarath Amunugama said about a year ago, you don't need a government to achieve such a rate of growth. Irrespective of a government's policies, the economy would of its own achieve around a 5 per cent economic growth. Pro-active government policies and the overall conditions favourable to economic growth are needed to propel the economy to rates of growth that are much higher than 5 per cent.

Besides this, the sustaining of growth at a higher rate requires the continuity of these conditions. At times the country has been quite pleased with rates of growth higher than its 5 per cent average. These attainments have mostly been when the economy has recovered after a spell of retardation. Statistically this is quite easy to achieve once the factors that caused the dip in the economy are removed and normalcy is achieved. It's quite another matter to add momentum to achieve higher rates of growth and sustain the economy at a high rate of growth.
What the South East Asian and East Asian Economies achieved was sustained high rates of growth over two or more decades.

This is what the Indian and Chinese economies have been achieving in the last several years. This is what we have failed to achieve. The average rate of economic growth in the last sixteen years (1990- 2005) has been less than 5 per cent (4.9 per cent) and in the last six years (2000-2005), the average annual economic growth has been only 4.3 per cent: less than the 5.2 per cent that was achieved in the decade of the nineties. In another words the rate of economic growth has been declining in each semi decade since 1990, while we are continuously talking about the need to achieve much higher rates of growth.Instead of crowing about super economic growth rates in the future we must buckle down to developing the environment that would be conducive to investment and growth. Such an environment requires several basic features.

Few of the most vital pre-requisites are: peace and security; law and order and protection of property rights; continuity and predictability in economic policies; a policy framework that is supportive of investment and economic incentives for development of industry, agriculture and services. Can we at least say we are on the road to the attainment of these conditions? The country's preoccupations are elsewhere.

Political conflicts have created a situation where serious solutions to national problems have become near impossible. Fiscal discipline is abandoned, corruption is rampant, law and order are not enforced without fear or favour and property rights are insecure. This is not the kind of environment in which an economy could thrive.

We are probably heading for a dip in the economy this year especially owing to the set back to the peace process. We can of course continue to wax about higher economic growth rates in the future! These higher growth rates have turned out to be a mirage, the closer we get the more distant the dream.

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