President’s invitation for constructive criticism; some points to consider

President Anura Kumara Dissanayake

What has to be understood is the fact that over the years, what has happened is that Governments have only ‘managed’ the economy, and that too not very well, and not developed the economy. This indicates that a fundamental change in thinking is required. To do so, a great change in thinking is urgently required. Though the political will to do so has been expressed, I am not too certain, that the process to achieve has been understood

 

The introduction of a new industrial structure, with vertical and horizontal integration is a must to spread development amongst more people. The idea is to include the un-included. To do all these things, the Government may have to rely on a new concept of SOEs and Development Banks, though the present thinking even within the NPP is not quite clear. If the economic policy is well thought of, it should have indicated that for a developing country to progress both monetary policy and fiscal policy have to work together in tandem, towards a common goal. This I am certain has not been understood. At present it works at cross purposes

Most Sri Lankan economists think like accountants, who have been trained to think within a given framework. Economists are expected to think beyond, to be able to ‘design the future’. This was the difference that got the East Asian countries to where they are, and now China. Therefore, if the President follows the bureaucratic advice, without seeking new ideas, the path would be difficult. Actually, what is required is to change the direction where our economists look. Traditionally, it was the West that was looked at. A look East would teach some lessons that are not seen in the West

 

The IMF then, got Sri Lanka to work according to their plan, with the normal ratios and limits. Sri Lanka could still come up with a viable plan to enhance its forex earnings, while working within the IMF program and move out once it reaches a level of being able to support itself. However, the average thinking will not deliver what is needed. Sri Lanka’s perennial problem, since independence, the inability to think beyond the average, the main cause of the economic lag, showed up once again, when dealing with the IMF. If one does a good analysis of the IMF program, it becomes clear that we would once again be in trouble. Therefore, we need to develop far beyond the figures in the IMF

Once the Parliamentary election is over and a government is formed with more members, a development plan, at least an indicative one is expected. This would make everyone aware of what Sri Lanka hopes to do and where they could fit in. Sri Lanka is the only country in Asia to try development, without a plan, except for the short ‘five-year plan’ derailed by the ‘oil shock’. Sri Lanka first invited FDI in 1954, when Sir John was Prime Minister. The response has been extremely poor. Why this was so needs to be analysed

A new President has been elected and a government formed, with Parliamentary elections fixed for mid-November, to decide the composition of Parliament.

The President’s address to the nation a few days ago, had something that has not been around for a long time. That was the invitation for constructive criticism, which is highly welcome in a democracy.

I would therefore, like to mention a few points that would hopefully be considered.

Do not repeat mistakes

The former President made a fundamental mistake by only focusing on stabilisation to be able to reach debt sustainability, as advised by the IMF, while sacrificing growth and development, amongst many others, which could have been avoided, with better ‘out of the box’ thinking.

Even the methods used to get over the ‘Great Depression’ that overwhelmed the world economy, (in the 1930s) has been forgotten and pushed aside, until it was needed to get over the Global Financial Crisis (GFC). What it highlights is the fact that in a great crisis, orthodox economic theory has little chance of success, as it has no solution.

Debt sustainability could have been brought about as the ‘natural result’ of economic expansion. Though many would argue that economic expansion cannot be brought about without additional ‘conventional’ investment, is the orthodox view. Please look East, and draw on their experience.

There are other possibilities which could be activated with the minimum investment, while some would generate its own investment. I have written about these before and would not use up space in this short article.

However, what should be understood is that the stability and debt sustainability would not bring about economic development or expansion. Economic stability includes a stable Balance of Payments, which does not just happen, without export expansion.

The main point that has to be got across is that a change in style, without a change in substance is no change at all.

Take note of the highly ‘inflated economic statistics’

The economic statistics have been of concern for quite a while, as the statistics seem to be on a different trajectory, unrelated to ground realities. Over the past two decades, a certain degree of manipulation could be noticed.

The GDP figure is given as Rs. 27 trillion and converted to US Dollars at around 80+ billion. This rupee figure includes inflation and without inflation it works out to Rs. 11 trillion, what then would the conversion be? Certainly not the 80+ billion they are projecting. Normally the difference between nominal GDP and real GDP is not as great as in the above figures, but with the huge difference, the reality of the situation requires greater analysis.

Some use the nominal figure at times while others use the real figure. Different websites have different figures. A proper analysis would be shocking and indicate a much lower figure

Therefore, make certain what the actual figure is, as it would be fundamental in all debt negotiations.

Bureaucratic trap and the conventional trap

New governments and Presidents often fall into the bureaucratic trap, particularly with regard to macroeconomic aspects. The bureaucrats at the Ministry of Finance and the Central Bank, who have been trained in orthodox economics, work within what they have been taught and do not dare ‘think out of the box’.

Most Sri Lankan economists, think like accountants, who have been trained to think within a given framework. Economists are expected to think beyond, to be able to ‘design the future’. This was the difference that got the East Asian countries to where they are, and now China.

Therefore, if the President follows the bureaucratic advice, without seeking new ideas, the path would be difficult. Actually, what is required is to change the direction where our economists look. Traditionally, it was the West that was looked at. A look East would teach some lessons that are not seen in the West.

An important point to note and highlight is the fact that the Western agencies and universities, when describing the East Asian success or ‘East Asian Miracle’ as they call it, start from the point that suits them. Export oriented development is their starting point, and does not mention how those countries got to the point, where it was possible to start exports, as it is not what they want others to follow, as it does not fit into their present economic thinking.

So, the gullible try ad-hoc methods and fail as they have not followed the fundamentals and keep on borrowing, until bankrupt. Therefore, a greater idea of the many aspects of development and how it could be brought about should be 

looked at.

The other is the conventional trap. This happens by observing the ‘successful’ under the existing economic conditions, while not paying much attention to those who have ‘failed’ under the same conditions. The point is that those who ‘failed’ would have been more useful for the development process than those who thrived. This indicates the importance of good economic policy for development.

An example, Sri Lanka let one of its greatest companies go down. This company reached world standard in heavy construction, constructing many infra-structure projects for a fraction of the foreign costs, like Uda-Walawe for less than $ 10 million, while 15 years earlier, Gal-Oya cost around $ 100 million. The primary reason for the high foreign debt is the demise of this Sri Lankan company. The reason was that the Bank of Ceylon was more comfortable with lending to the import trade than for companies engaged in development. Therefore, be careful of both traps.

The NPP economic team should pay greater attention to these aspects.

IMF – program and purpose

The main purposes of creating the IMF were to promote international monetary cooperation, facilitate international trade, foster sustainable economic growth, help countries when facing Balance of Payments (BoP) problems, and to enable the global economy to function smoothly.

So, when Sri Lanka went to them for BoP support, without a plan, what could one expect?

The Sri Lankan negotiators had no plan they could present to the IMF.

The IMF then, got Sri Lanka to work according to their plan, with the normal ratios and limits. Sri Lanka could still come up with a viable plan to enhance its forex earnings, while working within the IMF program and move out once it reaches a level of being able to support itself.

However, the average thinking will not deliver what is needed. Sri Lanka’s perennial problem, since independence, the inability to think beyond the average, the main cause of the economic lag, showed up once again, when dealing with the IMF.

If one does a good analysis of the IMF program, it becomes clear that we would once again be in trouble. Therefore, we need to develop far beyond the figures in the IMF program.

Fundamental point

What has to be understood is the fact that over the years, what has happened is that Governments have only ‘managed’ the economy, and that too not very well, and not developed the economy. This indicates that a fundamental change in thinking is required.

To do so, a great change in thinking is urgently required. Though the political will to do so has been expressed, I am not too certain, that the process to achieve has been understood.

Sri Lanka, should have had a GDP of around $350-400 billion, that was its potential. Unfortunately, why we were not able to reach our potential has many reasons, among which the thinking deficit is the primary cause.

Therefore, unless we can think out of the ordinary or ‘out of the box’ not much progress could be achieved. This ‘out of the box’ thinking includes the ‘common sense’ instincts over established economic theory, developed to suit very different conditions.

An example was when ‘Demand management’ was introduced in the developed economies, it was said that it was not relevant for developing countries, without realising that it could have been used for ‘Supply Management’ in developing countries, which could have helped greatly in developing industry. The economists in East Asia realised this, while we still ape the west, and that too not understanding how the west developed, which is amply explained by Ha Joon Chang in his book ‘Kicking away the ladder’.

Boldness and self-confidence required

What is almost certain is that the required investment is not going to come as expected from the private sector into the required sectors, as they have developed themselves mostly on the import trade, except for a few. Therefore, with the financialisation of the economy, where the financial sector is king, not much would change without bold action to get the economy to move on a development path.

The introduction of a new industrial structure, with vertical and horizontal integration is a must to spread development amongst more people. The idea is to include the un-included. To do all these things, the government may have to rely on a new concept of SOEs and Development Banks, though the present thinking even within the NPP is not quite clear.

If the economic policy is well thought of, it should have indicated that for a developing country to progress both monetary policy and fiscal policy have to work together in tandem, towards a common goal. This I am certain has not been understood. At present it works at cross purposes.

The importance of a plan

I expected the NPP to have worked out a short-term plan to be put into play from day one. However, it may be unfair to expect anything much until the Parliamentary election is done with.

Once the Parliamentary election is over and a government is formed with more members, a development plan, at least an indicative one is expected. This would make everyone aware of what Sri Lanka hopes to do and where they could fit in. Sri Lanka is the only country in Asia to try development, without a plan, except for the short ‘five-year plan’ derailed by the ‘oil shock’.

Sri Lanka first invited FDI in 1954, when Sir John was Prime Minister. The response has been extremely poor. Why this was so needs to be analysed. 

A well thought out plan, would indicate the areas where FDI is required, areas for private sector investment, the human resources required, the development of the SMI sector and most important, if public investment is required and in what sectors.

The financing of such a plan and the incentives to drive it forward, would be known in advance and would not be of a surprise. All Asian countries from Singapore to China have used a plan for development and after a certain stage has been reached, when market forces could function properly, used the market to direct the economy. What we have tried is putting the cart before the horse.

I have only mentioned a few points in this short article, whereas much more should have been pointed out, which hopefully could be done, as we move forward.

Short-term possibilities

I do hope that the Government and the President realise that the solution to the immediate problem is to enhance exports, while also convincing the IMF that it is workable.

In a report initiated by the World Bank (WB) it was reported that the present exports could be enhance by as much as $ 10 billion, within the present exporters, who need a bit of help. Likewise, there are other sectors that could enhance exports by around another $ 10 billion.

If there is a will, much more could be achieved in this country. I would like to point out that this country has done most of the things that South Korea did, even before the Koreans, but only to stop due to lack of government support. Whereas in Korea, those companies were developed with government support.

Therefore, let’s hope that ‘common sense’ prevails over the failed neo-liberal thinking, which was in vogue over the past four decades. The problem is that though it has proved itself as a failure, many do not understand it and why it was a failure.

When the global economy faced one of its worst crises, it was the states in all the major economies that had to rescue the economies from collapse, that in itself has a deep lesson to be understood, if much thought is given.

Therefore, let’s hope common sense becomes the driving force and the President keeps an open mind to all the advice he receives and acts in the best interests of the country.