Does the common Opposition have what it takes? Can RW walk the talk?

Tuesday, 23 December 2014 01:01 - - {{hitsCtrl.values.hits}}

By Rauff Reffai A prominent economist who runs a weekly column in the Sunday Times observes in this Sunday’s issue that: nThere has been a resurgence of the economy since the end of the war in 2009 (7.3% growth in GDP this year) however, the following critical issues surface to block development.

Foreign indebtedness (see Table 3 below) which had increased substantially.
Large public debt component.
Increased debt-servicing costs.
Large trade deficits.
Inadequate spending on social infrastructure and education (technical education in particular)
Care of the elderly in the face of a widening ageing population.

The mystery deepens when one questions (as Verite Research did in June last year in the DM) where the jobs are while this growth was going on. In fact there was a job loss of over 68,000 in 2012 compared to the previous year. Many other measures throw a somewhat

sombre light on what the policy pundits of the government have achieved in the post-war years. Some of them are analysed in this article in the backdrop of the five (5) strategic questions raised by a strategy consultancy (MTI) recently in the media: What is the country’s competitiveness? Or more clearly what is our competitiveness inter-alia competitiveness of the firm? Simply we have slid from 65th to 73rd position this year in the Global Competitiveness Index (among 144 countries). What is causing this is a couple of top line “Items” in the reform agenda. Firm Competitiveness (both in the formal and informal sectors) is in disarray, exacerbated by low productivity and factor misallocation (Read Michael Porter on Firm Competitiveness for a deeper understanding). The second item which is causing the internal bleeding is the colossal lossess (Rs. 250 billion in 2012) of state-owned enterprises. Significantly the top three in 2011 are CEB (Rs.19.2 billion), CPC (Rs. 94.5 billion) and Mihin Lanka (Rs.1.9 billion) respectively. The scale and speed of the deterioration of the CEB is unbelievable (Rs.70 billion within 2010 and 2011 alone) Why is this the case? One has only to look at the recent history of the enterprise (Sunday Leader 5 May 2013 Gross Mismanagement at CEB where Lanka Transformers Ltd., a viable venture had sunk to a loss-making one) and wilful mistiming of decisions to shut down plants for routine maintenance of hydro turbines (Victoria/Luxapana and Kukuleganga) accelerating losses to the tune of Rs. 10 billion for the ten-day period of the maintenance (Sunday Leader 30 June 2013).

Any attempt at Public Enterprise Reforms had ended up in failure too. The Ministry of Public Management Reforms initiated a reform agenda and spent time and money mobilising consultants to pilot and drive programs aimed at enhancing policy responsiveness, enhancing efficiency and effectiveness and enhance accountability of PEs from around mid-2011. However, what the additional secretary had to say after more than a year piloting this program, in January 2013, surprised many. The reform initiatives were not attractive and might not be digestible and marketable (to the SOEs) despite the development of a public management reform roadmap, crafting the first integrated Nuwara Eliya district development plan, reducing the rank of doing business index and similar (see the author’s article on the last theme on 20 November of this year in the Daily Mirror for interesting observations/recommendations). This was not surprising as the UNF Government in 2001 had identified the root cause as the lack of national policy on PEs, insufficient accountability and transparency, implementation delays and competency shortfalls as impediments to an efficient public service and the efficient management of PEs. An attempt to re-invent the wheel had to meet with failure. Was it that RW was a better leader? Or the administration commanded the talent to lead such change successfully. Can national productivity be improved? IFC (World Bank) Country Manager Adam Sack no less, observed (quoted by the author in detail in the 20 November 2014 article in DM entitled ‘Response to Verite Research: Improving the business environment’) that improving productivity,

particularly labour productivity, would increase the FDI by a corresponding percentage. While it may be true that land fragmentation (not much achieved in consolidating fragmented land through transfer of titles etc.) is a major factor in low productivity in the agriculture and crop sector, it is lack of people ‘engagement’* that is dragging the competitiveness at the firm level down. In comparison Sri Lanka’s productivity is half that of Thailand and this is compounded by a subsidy dependency, maintaining highly inefficient, wasteful and corrupt structures. One economist had commented that something worse than a monopoly is a duopoly, where for example CPC and IOC are operating in the import and distribution of fuel. Pour into this unsavoury mix tax concessions (visibly to bail the enterprise out on the short/medium term) Sri Lankan/Mihin Air become eligible for ten-year income tax exemptions while the CEB and CPC also qualify for five-year tax exemptions with effect from April 2011. This certainly takes the cake! What does this tell us? Simply that the Government is covering up its inefficiencies and no effort is being made to rectify these long-ailing state enterprises. This situation cannot prolong further. It’s suicidal if we do not unbundle the CEB to farm out specific operations for productivity and efficiency improvement and broad base the power sector and petroleum distribution to new players to promote competitive pricing mechanisms, ultimately benefiting the consumer. This is exactly what RW wished to implement in the first place. Now the realisation is dawning on us. Ensure economic growth and development which reaches the ‘bottom of the pyramid’ (GDP growth in Tradeables than Non-tradeables narrowing income distribution between the top and bottom segments of the workforce, creating new employment)

What is now evident is that only 4 % of the national income is shared by the bottom 20 % of the population while the richest 20 % of the population command 55 % of the income/GDP inevitably pointing to the growing differential between the top end and bottom end of the income spectrum. This can only lead to one situation: Social unrest and even the fracture the peaceful co-existence of various segments of the population. The wisdom of the 17th Amendment to the Constitution to promote inclusive growth can now be understood. RW was spot on. Improving export competitiveness It is surprising for the informed reader to realise how often the powers keep harping on the role of the private sector without a semblance of awareness as to what is going wrong. I did touch on the mechanism adopted by the CBSL to control the exchange rate of the country to the detriment of export-growth (in my last article in the DM 20 November 2014). The real exchange rate directly influences resource allocation between Tradeable and Non-tradeable goods. International reserves rise due to increased foreign inward remittance and foreign borrowings, thereby causing the domestic currency to appreciate. Such real exchange rate appreciation caused by exogenous factors, leads to weakening of the export competitiveness of the domestic industry, which is symptomatic of the ‘Dutch disease’ - erosion of export competitiveness in the Netherlands in the 1960s due to appreciation of domestic currency pushing the relative prices of Non-tradable goods (infrastructure, utilities and similar) against Tradeable goods, causing the shift of resources to the Non-tradeable segment drastically reducing the

country’s export competitiveness. You will of course realise now that if we need to increase our export competitiveness the currency needs to be re-valued (or pegged to the actual trading position of the country). We have to realise that if we are to simulate Malaysia in export growth (82% of GDP) we need to have the right macroeconomic environment, including the exchange rate regime. Exporters will welcome the policy change as essential ‘support’ to boost exports. (Read the last paragraph of my 20 November 2014 article in the DM for more detailed strategies). RW did understand this mechanism to such an extent that he was misunderstood to be supporting the ‘trickle’ down classical model. Creating a positive psychological climate among all constituents (i.e. Promoting good governance) The manifesto of the common candidate says that “it will create the necessary just political atmosphere for the establishment of a Government based on free media” in its true sense. While media freedom is both the guardian of free opinion it is also the vehicle for promoting good governance by spotlighting responsibly the deviations (if any) of policymakers and government leaders. The present Chairman of the Ceylon Chamber of Commerce said at a recent national forum that Sri Lanka’s regulatory systems, as it applies to the private sector, is in need of an overhaul. Many regulations are perceived as a deterrent to investment and doing business than as an enabler. A consultative process between the public and private sectors is essential before new regulations are implemented. We need to move from this adversarial relationship (contrary to whatever is said in the open) to one of partnership and ongoing consultation which may yield the remedy eluding the Government. When the real outcome of a sound economy is felt by the people (at the bottom of the pyramid) then all segments of society become ‘engaged’. The drivers of this engagement are good leadership, integrity and sound policies. (The writer is an institutional specialist on multilateral donor funded projects and consultant to private and public sector enterprises. He can be reached via [email protected].)