Thursday, 20 March 2014 00:00
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In his customary article in the Daily FT on Monday, 17 March 2014, W.A. Wijewardena blames politicians for trying to achieve higher and higher growth. He sees such attempts as “impatience”. I am surprised to hear such an argument from someone like Mr. Wijewardena who is regarded by some as a reputed economist. Mr. Wijewardena should know that when it comes to individual economic ambitions, any rational economic agent’s intention is to grow as fast as possible. This could be done in two ways. First, try to achieve the maximum growth within his or her capacity. Second, try to increase his/her capacity in order to continuously sustain such growth. For example, individuals continue to learn new skills to increase their capacity and increase physical investments by borrowing or using their own resources, in order to increase their capacity to expand at the fastest possible pace.
The economy consists of collection of such ambitious individuals with rational objectives, and politicians are supposed to represent such individuals. Therefore it is of paramount importance for successful politicians to do their best to help their constituents to achieve their individual ambitions by facilitating the expansion of their capacities by developing economic and social infrastructure which will enable them to continuously increase their installed “engine capacity”, as described by Mr. Wijewardena in his article. One of the main reasons behind many successful East Asian economies (East Asian Miracle as documented by the World Bank) was this type of political leadership in those countries, which acted to fulfil their constituents’ economic ambitions. If, on the other hand, those countries had political leaders who were advised by people like Mr. Wijewardena, it is very likely that the world would not be talking about Asian miracles today!
From an economist’s point of view, let’s consider what potential output is, and how it is measured. Technically, potential output captures the historical growth trend of a country’s output, and extends such trend for a future period, assuming that the historical factors which supported the past output would remain basically unchanged in the future as well. In Sri Lanka’s context, when one considers a long term data series, the major part of such period would represent a conflict period with relatively low investment ratios, which generated the historical outputs. However, Sri Lanka has undergone a massive structural change after the end of the conflict in May 2009, while significant social and economic infrastructure development has also taken place in recent years. So naturally, the potential past output estimated using such methodology would have been substantially lower than the actual future potential. There are of course techniques in regression analyses to capture such structural adjustments, but in the Sri Lankan context, the shorter time period after the change, may have restricted the degree of freedom in the estimation. Therefore, any analysis based on an unadjusted regression analysis is bound to produce erroneous estimates.
In my view, it is likely that the researchers may have highlighted such factor in the research paper under reference, although Mr. Wijewardena may have conveniently chosen to ignore such factors in his article, due to the increasing political bias in his recent analyses, which have been overtaking his previous economic understanding and rational assessments.
In conclusion, it may be observed that even with the weaknesses in the regression analysis, the potential output has been estimated between 6.5% to 6.8%. In that scenario, if the rapidly rising investment to GDP ratios in the recent years in Sri Lanka is incorporated to which the country’s resources and opportunities arising out of the new economic activities is added, it is clear that the country could grow at around 8% over the next several years, without suffering from an overheating situation as warned by Mr. Wijewardena.
Practical Economist
