How can Sri Lanka avoid imminent economic collapse and extreme poverty?

The country has reached a critical stage in its history. The presidential and the general elections due very soon could turn the country over to a set of so-called leaders who could drive the country to the status of a ‘failed state’ like Somalia. None of the political parties and leaders thereof have developed a set of strategies suited to carry the country to prosperity unlike the East Asian countries which have consistently adopted a set of Social Market Economic Policies from the 1970s and realised prosperity – Pic by Shehan Gunasekara

General and presidential elections are due to be held in a few months’ time. However, in addition to failing badly to serve the country so far, not a single main political party has announced a set of practical strategies and policies that could meet the needs of the people and develop the economy although it is on the verge of collapse, especially because of a huge external debt (of over $ 50 billion) that cannot be repaid without borrowing further! Therefore the following set of strategies is proposed for rescuing the economy mainly on the lines proposed in my book, ‘Export Competitiveness and Poverty Alleviation’ published by the Godage Bookshop in2017.

The goals of the strategies

The achievement of the 17 Sustainable Development Goals of the UN including the alleviation of poverty and zero hunger. According to the World Bank, the number of those earning less than $ 2.5 per day was about 32% (in inflation adjusted terms) of the people as of 2012/13 (Sri Lanka: A Systematic Country Diagnostic, World Bank, 2016) with extreme poverty mainly in the estates and in the northern and eastern parts of the country. This level of poverty may have now increased due to the recent rise in prices of essentials.

Strategies to achieve the goals

Increase export-oriented investments rapidly.

Raise the level of productivity of all sectors.

Enhance the global competitiveness of all products and services.

Introduce land reform to raise the level of rural agricultural productivity. 

The civil leaders, the professionals and the clergy to explain these strategies to the people in a language they understand.

Each citizen to decide to do whatever possible to implement these strategies.

What follows are implementable sub strategies under each main strategy as not much has been achieved by all governments in removing various constraints to progress.

1. Increase export-oriented investments rapidly

Sub strategies:

i. Remove all barriers mainly to Foreign Direct Investment (FDI).The country needs to invest about 35-40% of Gross Domestic Product (GDP, or the total money value of all goods and services produced in the country that was about $ 87 billion in 2017) ,to increase the rate of economic growth to around 8% a year. But the country saves an average of about 26% of GDP. This is one of the reasons for attracting FDI; the other reasons being that they bring in scarce technologies, skills as well as world market access. According to UNCTAD the stock of FDI received by Sri Lanka up to 2016 was about $ 9.7 billion – most of it for construction and not for production of goods and services, whereas the stocks of FDI inflows in billions of dollars $ to some of the East Asian economies particularly the ‘little tigers’, South Korea 185.0, Hong Kong 1,690.8, Thailand 188.7, Malaysia 121.6, Singapore 1,096.3, as of 2016. The main reason for the fear on the part of the FDIs to invest in Sri Lanka could certainly be political and policy instability that has prevailed in the country from 1983. The political instability could be attributed mainly to the 30-year internal conflict, the frequent clashes among the communities that have occurred up to the present time due to the failure on the part of the leaders to solve the ethnic conflict, after the end of the war in 2009, as well as the inability of the political parties to maintain good standards of management, conduct and governance within the parties and outside to serve the nation. 

The policy instability is apparently due chiefly to the inconsistent adoption of different kinds of policies including import substitution policies (which do not help to expand exports), open market policies only for a short period during 1978 to about 1993, in a ‘ding dong’ fashion over the years; in addition costs were pushed up by continued budget deficits; the East Asian ‘little tigers’ on the other hand adopted mostly open market policies consistently and succeeded spectacularly. 

The main solution to the political instability appears to be the enactment of a new constitution similar to that of South Africa with equal rights for all and regional devolution of power so that a set of uncorrupt politicians with a desire to practice good governance to serve the people could emerge. (The policy reforms required are discussed later in the article).

ii. Adoption of suitable ‘social market’ economic policies (mix of socialist and capitalist policies, treating the private sector as the ‘engine of growth’) and not import substitution policies, while the State concentrates on development of areas such as infrastructure including education, health and social welfare that the private sector may ignore, due to low profitability.

iii. Achieving macroeconomic stability by continuously reducing budget deficits by resort to increasing Government revenue especially by taxing the wealthy more heavily, while reducing expenditure mainly on defence and by privatising/part privatising the State-Owned Enterprises which are incurring annual losses estimated at Rs. 200 billion.

iv. Maintaining law and order by avoiding the politicisation of the Judiciary and the police force as well as by introducing a system to remove the backlog of pending cases in the courts of law,

v. Improving the efficiency and effectiveness of the State administrative apparatus especially by making appointments on merit alone, for which it is necessary to remove article 55 in the Constitution that empowers the cabinet of ministers to make appointments and promotions of public officials, most often on political affiliations.

vi. Drastic reduction of corruption (Corruption Perception Index, rank Sri Lanka 89,Mauritius 56, Malaysia 61 and Singapore 1 out of 180 countries, Transparency International, 2012-18) by making a constitutional provision that parliamentarians be honest and by enacting a special law to set up an anti- corruption agency answerable direct to parliament; also by creating special courts for the purpose.

vii. Provision of economic incentives for investment and elimination of disincentives like the complex and cumbersome regulations for production (Ease of Doing Business Index Sri Lanka 100, Singapore 2 and Malaysia 15 out of 190 countries, World Bank, 2018).

2. Raise the level of productivity of all sectors

(Productivity/output per employed person $, Sri Lanka 31,692, Malaysia 63,324, Singapore 133,915, Conference Board Data Base, 2017) 

Sub strategies:

i. Rationalisation of the highly complex labour laws and regulations,

ii. Development of physical and social infrastructure, particularly education and training, to create world-class soft and technical skills ; the former especially by teaching life skills, creativity, leadership, communication, including the English language , the latter by introducing science, technology, engineering and math, (STEM) subjects; (strangely all governments have failed to undertake such a system to provide the skills demanded by investors).

iii. Absorption of the excess employment in rural agriculture(26% of the labour force) into the manufacturing sector as cultivable land is limited, to increase the size of farms/their productivity and also save the natural environment; (manufacturing has not emerged as a major sector due to the failure to attract, especially FDI).

iv. Encouraging firms to reduce unit costs by increasing the scale of production mainly for export and for offering incentives to workers to improve their productivity/more outputs from the same quantum of inputs.

3. Enhance the global competitiveness of all products and services

(Global Competitiveness Index, Sri Lanka 85, Singapore 2, Malaysia 25 out of 140 countries, World Economic Forum, 2018).

Sub strategies:

i. Resorting to open trade by lowering the import tariffs and para tariffs such as cesses which create an anti- export bias (‘The present import regime is one of the most complex and protectionist in the world’, SL: A Systematic Country Diagnostic, World Bank, 2016) giving time to domestic market oriented firms to adjust, to create competition among firms to induce higher investment and improve value addition to satisfy global customer needs.

ii. Supporting research and development/innovation to encourage firms to add value to export goods and services in such a way as to avoid competition (referred to as ‘differentiation’).

4. Introduce land reform to raise the level of rural agricultural productivity (completely ignored by all governments as an alternative strategy of poverty alleviation, though successfully adopted by countries such as Japan, South Korea and Taiwan before industrialisation)

(Agricultural productivity or value added per worker, Sri Lanka $ 2,533, Maldives $ 11,300, Malaysia $18,124, Singapore $ 22,703, World Bank, 2017)

Sub strategies:

i. Giving ownership of the land leased by the State to farmers (heavy fragmentation and subsistence/no profit orientation have taken place: 62% of plots under one acre in size and 45% under ¼ acre in size- Census of Agriculture, DCS, 2002) to induce small subsistence farmers to sell their land to owners of larger farms leading to consolidation and improvement of productivity or lowering of unit costs. 

ii. Re-plotting to move farms closer to each other and construction of paved roads to reduce costs of using machinery. 

iii. Promotion of the cultivation of selected (export) crops on a large scale to reduce unit costs, also with comparative advantage against crops grown by competitor countries.

iv. Creating urban centres in rural areas with infrastructure and various industries and services to further process and market agricultural produce and for offering off-farm employment to those who do not want to engage in farming. 

v. Implementing a scheme to de-silt reservoirs, repair tank bunds and canals, set up facilities to provide clean drinking water and construct rural roads and bridges, similar to the successful Gammadda programme of the Sirasa TV/the Maharaja Organisation.

5. Civil leaders, professionals and clergy to explain these strategies to the people in a language they understand

Sub strategies:

i. First consult the people regarding their basic needs.

ii. Improve on the above strategies.

iii. Resort to digital/electronic ways of explaining since most people do not read. 

6. Each citizen to decide to do whatever possible to implement these strategies

Sub strategies:

i. Give priority to the country/people and not to a political party.

ii. Understand the strategies and improve on them.

iii. Contribute by carrying out at least one activity as frequently as possible.

Conclusion

The country has reached a critical stage in its history. The presidential and the general elections due very soon could turn the country over to a set of so-called leaders who could drive the country to the status of a ‘failed state’ like Somalia. None of the political parties and leaders thereof have developed a set of strategies suited to carry the country to prosperity unlike the East Asian countries which have consistently adopted a set of Social Market Economic Policies from the 1970s and realised prosperity. 

However, the political parties concerned in Sri Lanka could be pressurised to put forward a set of suitable strategies similar to those described above if strongly demanded by the people. For this purpose, the professionals, school and university teachers as well as the clergy, especially the Buddhist priests, who have considerable influence over the majority in the country, could educate the people about the basics of economic development required such as the need of attracting export-oriented investment by restoring political and policy stability, improving the productivity of land, labour, capital etc., and global competitiveness, in a language they understand.

(The writer is a Development Economist.)