Govt, spending far too much, creating far too much money :Drift, takeoff, or relapse | Sunday Observer

Govt, spending far too much, creating far too much money :Drift, takeoff, or relapse

Prof. Razeen Sally     Pic: Lake House Media Library

Professor Razeen Sally, of Singapore’s Lee Kuan Yew School of Public Policy, delivered a wide ranging talk last Tuesday at Excel World in conjunction with the Advocata Institute, wherein he detailed three possible futures for Sri Lanka: drift, takeoff, and relapse.

Despite the current government’s optimistic rhetoric regarding the improvement of governance, economic policy, and ethnic relations, Sally dourly said, little progress has actually been made towards propelling the country to a better future.

Furthermore, he thinks the country is much closer to relapsing into a Rajapaksa-style strong man state than undergoing the significant economic growth that would lead to wider prosperity. Sally warned, growing Chinese influence, restrictive economic, monetary, and fiscal policies, a calcified, corrupt, and complacent political and economic Colombo elite, and simmering ethnic tensions could conspire to destroy any or all progress made by the coalition government.

His advice to avert such disaster? Widespread economic, political, and private sector decentralization, the propagation of a younger, more capable, less corrupt elite class, increased foreign investment, and closer ties with the United States, Europe, and India.

Though Sally outlined three possible futures, he later confessed that the first, drift, is fundamentally unstable, and that takeoff or relapse would eventually occur, with the latter, far likelier at this point.

“I don’t think we can be assured that we can continue to drift, therefore, we need not be too worried. That I think is part of that accursed Sri Lankan elite complacency. Rather, I think the danger is, if we don’t make judicious moves towards scenario two, the takeoff scenario, we are going to go back into scenario three, that of relapse. So, the stakes are very, very high,” Sally said.

Reflections on the coalition government

While Sally did offer some credit to the unity government, concentrating on their achievements in opening the press, making the correct overtures to ethnic and religious minorities, working on a new, improved constitution, and re-balancing foreign relations, he also liberally criticized many of the government’s political and economic moves, or lack thereof.

First, he lambasted the country’s current quality of governance: “The bad news, to begin with, is of course that good governance is back to where it was before the Rajapaksas. In other words, we again have bad to mediocre governance that’s rife with corruption and nepotism,” he said.

Moreover, he derided the administration for making scant progress towards land restitution, redressing human rights abuses, demilitarization, and devolution of power.

His most passionate scolding was reserved for the existing economic policy, though he did praise the appointment of Indrajit Coomaraswamy as Governor of the Central Bank.

“Now, these policies are of course not new, and this has been the case almost since independence, with government spending far too much and creating far too much money. There’s been too much public debt created, inflation, current account deficits, and a weaker currency,” he said.

The continuation of these policies has led, in his estimation, to Sri Lanka turning to the International Monetary Fund for help, an outcome that he disparaged.

Other topics that elicited pronounced criticism from Sally included restrictions on business and lacklustre trade.

“As the business people in the room know, there is a serious problem here with approvals for various projects. You are forced to go through multiple agencies that take too long and are corrupt. Then, there’s the lack of technology, the lack of things that are online,” he said.

Trade, for Sally, continues to be a particularly poorly performing sector, since the island has a ‘shockingly’ low trade to GDP ratio, at about 50%. Countries like Taiwan and Malaysia, which boast similar population sizes to Sri Lanka, have a trade to GDP ratio of between 150-200%.

“The export basket remains static, with tea, other plantation crops, and garments. But, it hasn’t diversified into the all sorts of exports, that East Asian countries have diversified into. Sri Lanka is not in global value chains with the exception of garments. It’s not in information and communication technology, and it’s not in all sorts of other services,” said Sally, without elaborating on what sorts of services he would like to see, other than improved shipping and logistics.

Yet another point of contention for Sally is, the country’s over reliance on China without the balancing influence of Europe, U.S.A., and India.

“Sri Lanka is now drifting back into Chinese influence without the appropriate countervailing balance of productive private sector investment coming from the West and India. That investment, by the way, would be far more productive than what we would get from Chinese state-owned companies,” he said.

Sally concluded the opening section of his speech by remarking on the tendency of the political class to maintain itself despite the vicissitudes of the government.

“What is striking is that though the government has changed, the political class hasn’t. Musical chairs have been played within the political class,” he joked.

Though the current situation is unpalatable and unsustainable, Sally still holds the hope that the country can one day improve itself.

“Sri Lanka never misses an opportunity to miss an opportunity. I hope that opportunity has not been squandered. It’s late in the day, but that window is still there. I hope it’s grasped. If it isn’t, then we will see this continued drift,” he said.

Recommendations

The second portion of his speech dealt with the second scenario: that of takeoff. This portion amounted to a series of public policy, economic, and institutional recommendations that were all strung together by the theme of decentralization.

“We need more decentralized politics, and with it more decentralized business. I’m not talking about dysfunctional provincial councils. I’m talking about devolving power, real power over taxation and expenditure, to municipal authorities and mayors. We need to create new rules of governance for these decentralized units to allow these experiments to happen, because there’s a better chance that they will happen there, than they will in Colombo at the national level,” he said.

This plan would enable the empowerment of those in second-tier Sri Lankan cities, hopefully leading to a new group of elites who would conduct business in a more satisfactory manner than the current Colombo-based group.

This decentralization goes hand in hand with significant trade and investment liberalization, a simpler tax structure, and no price or exchange controls. These measures, according to Sally, would lead to the enrichment of all people, instead of solely the elites.

It must be mentioned, however, that it is these very economic liberalization measures that have led to skyrocketing inequality the world over. It is no wonder, moreover, that Sally called for increased globalization and foreign investment and involvement in Sri Lankan economics.

Furthermore, Sally also would like to see a national growth rate between 6-8%, as opposed to around 4-5% and argued, this could be aided by having an independent Central Bank, low corporate and personal income taxes, relaxation of tariffs on imports, and a general shrinking of government.

“We need to see those ‘doing business reforms’ that have been promised for the last two years.

There should be much more stuff online, much less discretion for the bureaucrats, fewer agencies involved, shorter deadlines, and automatic procedures,” he said.

“This is really a matter of political will and leadership, because with the right will, and with a few competent people in charge, this is the sort of thing that can be done, especially, in a small country,” he said.

According to Sally, these measures would facilitate increased foreign investment, closer to, between $3-5 billion, up from the current level of under $1 billion.

Sally contends that, by dialing back government regulation, the economy will grow, providing opportunities for people who currently do not have many options to improve their lots. If one looks abroad for examples of these programs, he or she is greeted by many instances of skyrocketing inequality and increased exploitation of the poor at the hands of elites.

It is also notable that Sally had only disparaging remarks for socialism, a political system that has helped Sri Lanka achieve near universal literacy, excellent life expectancy, and the highest ranks of any South Asian country in the Human Development Index.

If the aforementioned reforms do not come about, Sri Lanka risks falling back into ethnic tension and strong man rule, according to Sally. These issues come first and foremost from economic difficulties.

Relapse

“If the economic pie is statist or shrinking, it means more political conflict, more distributional conflict. That’s the lesson of history. If the country is not growing economically to satisfy the aspirations of people, they will fight more, over slices of the pie,” he said. Indeed, increasing economic discontent can, bring about a yearning for a strong man and the scapegoating of ethnic and religious minorities.

“This is about a relapse into big man authoritarian politics, rather like Putin’s Russia.

So, a charismatic big man comes along, taking advantage of social discontent, wins a presidential election, and comes into clean house, which means neutering opponents, individuals, as well as institutions. It means someone who rides at the head of a movement rather than a political party,” he said.

“This big man is invariably going to be a Sinhala Buddhist chauvinist riding at the head of a resurgent Sinhala Buddhist movement,” he continued.

This would clearly be a disaster for Sri Lankans, and especially, Sri Lankan minorities, as the country has worked hard to extricate itself from the shadow of the decades-long civil conflict.

The economic effects of such an outcome were not lost on Sally, as he warned that it would foster a more state-centered economic system.

“It means a return to a static economy where the state has a much bigger direct role through the public sector, as well as a much bigger indirect role by shaping the private sector. It means allowing foreigners in much more selectively through very specific channels, provided they cut the right deals with the right people, the right family, the right clan. And that is a recipe for stagnation,” he argued.

In Sally’s view, this third scenario of relapse to rule by a Rajapaksa-like nationalist is much closer at hand than that of takeoff, as he does not think that the current economic, social, and political policies are sturdy enough to banish Sinhala Buddhist nationalism to the political sidelines, forever. “I’m not saying this last scenario is going to happen, it’s not pre-programed. But, it is a plausible scenario. And, with rising social discontent, particularly outside Colombo, I think this scenario becomes more plausible by the day or by the month, in the run up to the next presidential election, so I would take it very seriously. 

 

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