Business Times

Will the Sri Lankan economy take off?

Some lessons from Singapore
By Tilak Abeysinghe, Department of Economics, National University of Singapore

In 1965, when Singapore had to separate from the Malaysian Federation and be independent, economic and political challenges Singapore faced were by no means less severe than the challenges post-war Sri Lanka is facing now. Massive unemployment, low-skilled workforce, shortage of industrial entrepreneurs as opposed to commercial entrepreneurs, lack of domestic savings, wretched housing condition, militant labour unions, and racial riots were among the challenges that Singapore faced. But Singapore made it; the economy took off within 10 years from 1965 to 1975 and now enjoys one of the highest per capita incomes in the world.

Singapore invests heavily on its only resource; human skills, and focuses on providing “efficiency infrastructure”, not just physical infrastructure but efficient services to go with it. Picture shows children at a childcare centre read their story books during a lesson in Singapore. AFP

When Mr Lee Kuan Yue, the founding leader of independent Singapore and now Minister Mentor, was asked by a foreign journalist “what was the secret of Singapore’s success”, Mr Lee replied “There was no secret; we had no choice but to take a chance and sale into rough waters.”

Political stability and good governance played a key role in Singapore’s success. The Government’s development ideology has been growth driven, purely pragmatic and adaptable to changing circumstances. The cabinet is made up of highly skilled professionals drawn from various professions and paid handsomely to make politics attractive to such professionals. Consequently the top remains non-corrupt and so does the rest.

Singapore invests heavily on its only resource; human skills, and focuses on providing “efficiency infrastructure”, not just physical infrastructure but efficient services to go with it. Efficiency infrastructure is what makes Singapore attractive to foreign investors despite its relative cost disadvantages. Efficiency infrastructure is what sets Singapore port and airport apart from potential competitors who are otherwise geographically more advantaged.

Good governance includes good management of a plural society. The Singapore government does not allow people to arouse race and religious sensitivities. It is by and large a meritocratic system that tries to equalize opportunities (not outcomes) for every citizen of the country.

Singapore worked out its own unique model for development. This model cannot be transplanted elsewhere; each country has to work out its own unique development model. Nevertheless what I highlighted above are some important lessons that Sri Lanka can learn from the Singapore story.
Singapore’s economic architect, Dr Goh Keng Swee, pointed out that at the developmental stage non-economic factors play a much bigger role than economic factors. Among them, he argued, the role of government is pivotal.

The Nobel laureate, Amartya Sen, reiterated these views by arguing that good governance, not less governance, is crucial to addressing the challenges of economic inequality, environmental degradation and terrorism. The importance of political stability and good governance is again re-iterated in the 2008 Growth Report prepared by the Nobel Laureate Michael Spence on behalf of the Commission of Growth and Development.

Political stability is what is most needed for Sri Lanka now. Not only the experience of Singapore, the experience of other East and Southeast Asian economies amply demonstrates the importance of political stability in sustaining growth. Single-party rule over a long period provided the platform for a successful take off of their economies.

The frequent change of power in Sri Lanka between political parties has created a situation of what the American economist Mancur Olson called a roving bandit. The role of the roving bandit is to plunder as much as possible during his short stay in power without doing anything in return for the plundered. The problem with a single party rule is that it may become a stationary bandit. Although both bandits are bad, the stationary bandit is still better than the roving bandit. The stationary bandit has the incentive to make the pie bigger so that he can plunder more while keeping the plundered also better off.

Sri Lanka is less likely to settle to a single-party rule for a long-enough period for the economy to take off. Given this scenario, an alternative would be for all the political parties to agree upon a long-term economic agenda, a blue print, that the ruling party cannot deviate from without the consent of the other parties. The objective here is to set the vision beyond a single political term in office and reduce the engagement of the ruling party in crowd pleasing activities to win the next election. Such an agenda guarantees continuity (instead of complete or partial abandonment of previous party’s policy agenda that we have seen in the past) and keeps room open for branching off to new areas. Obviously the key ingredients of the long term policy agenda need to be worked out carefully.

Political stability does not necessarily ensure good governance. Although the leadership matters it is wishful thinking to wait for a benevolent leader to emerge and set everything right. In general quality of governance emerges through the type of economic system and political process in place. Private sector driven open economy, open to international trade and investment, is an important mechanism that tends to improve the quality of governance.

Apart from the experience of Singapore and other fast growing East and Southeast Asian economies, the disciplining effect of economic openness on the formidable bureaucracies of China and India is quite visible now. Even the most promising leaders in closed economies have failed to bring about the changes they desired because of over-powering bureaucracies. Although the Sri Lankan economy remained open since 1977, the country could not reap the full benefits of an open economy because of the war. It is unwise not to pursue the open economy policies just because of the uneven impact it had so far on the economy.

Private sector driven open economy does not mean that the government takes a hands off approach. Government’s heavy involvement in many sectors, at least until the economy takes off, is essential. Sri Lanka has inherited from its past one of the best irrigation systems in the world.

Making full use of this and developing the agricultural sector to create a stable domestic economy that can cushion the economy from international shocks that are transmitted through the open economy requires the government involvement and directive. As Singapore has done it Sri Lanka’s successful take-off lies on a “market driven guided economy”.

As a final note I would like to emphasise that the aim should not be for faster growth to catch up with others, the aim should be for sustained growth even at moderate levels. Faster growth comes with a price. Apart from rapid environmental degradation, it also tends to degrade human qualities. Sri Lanka stood out as an outlier in the developing world for its high human development indicators despite being a low income country. The war of course took a heavy toll on the economy and therefore on social programs. It is now a matter of reinvigorating this development process that focused more on the quality of growth.

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