Tuesday Nov 26, 2024
Tuesday Nov 26, 2024
Thursday, 24 October 2013 00:00 - - {{hitsCtrl.values.hits}}
By Shabiya Ali Ahlam
Q: You are visiting Sri Lanka at a very exciting time. How do you feel about being here?
A: It feels great. It’s my first time in Sri Lanka and I am happy to be here when it is getting ready for the Commonwealth Heads of Government Meeting (CHOGM). For Sri Lanka, the meeting next month is a very good window. I am an activist and my strong advice is to take advantage of the platform that CHOGM gives. For example, the Free Trade Agreement (FTA) Sri Lanka is going to sign with China. New Zealand was the first country to sign a FTA with China and it has been an exciting growth promotion for our economy. If Sri Lanka wants to grow, then free trade is really important. I praise Sri Lanka for doing what New Zealand did a few years ago. We are getting the pay off now and I am sure Sri Lanka will get the pay off later.
Q: Being the keynote speaker for the 34th National Conference of Chartered Accountants, which will be held under the theme ‘Innovate to Grow,’ what are the areas that you will be addressing?
A: We live in a world where there are small countries that have prospered with great ideas. Since the world is connected, there are huge international opportunities for countries to do very well. I will be talking about how Sri Lanka as a country can ensure that it gets the ingredients right to be able to capitalise on that opportunity.
Skype came from Estonia, Nokia came from Finland, and BlackBerry came from Canada. You can see a pattern of what is called creative destruction. So there is high opportunity and high risk. But for small countries such as Sri Lanka and New Zealand, I think if we get three key elements right, we will do well in the future.
We talk about financial capital and human capital, but it is creativity that in my view is the modern currency. Under creative capital are the three key elements of smart public policy, smart business environment and smart people. It is that combination that will produce an environment in which innovation can help transform an economy and it will challenge the status quo. If Sri Lanka continues to do what it is doing now, it will soon face a barrier that most countries have witnessed.
Q: Could you elaborate on that?
A: On smart policy, public policy matters. And the big shift in thinking is that governments don’t innovate, individuals do. So governments have to basically set the scene and let the creative people get on with it. That involves a pretty big shift in their thinking. That is to shift from a state-involved economic activity to allowing private individual and the private sector to take more of the initiatives.
Therefore state dominance should be moving in the direction of market dominance, embracing free trade, and the guarantee of rule of law. The latter is important since nobody will put their money at risk if they cannot enforce their property rights. Everywhere around the world it is observed that if people cannot rely on the rule of law, the wealth creating environment will be destroyed. This is because they are afraid of confiscation, they are afraid that their intellectual property rights are not secure. So if there is a question mark about rule of law, it is as if the country is telling its young people to go away and not do business.
On smart business environment, this is where resources are to shift to growing sectors. However, this often clashes with what the government thinks should happen. The government might be investing heavily in yesterday’s industries and putting a road block for the future and upcoming industries. I have seen lots of Sri Lankans move to other places in the world making stunning contributions in that country as they have a free environment to innovate. Well, that is not smart. Basically it is the innovation that matters and not the protection such as tax holidays and the availability of other incentives. It’s a matter of an idea taking hold, being competitive and consumers favouring it in its own right.
A country has to be market facing and not government facing, and that is the big shift. If you look at the Ease of Doing Business in Sri Lanka, New Zealand ranks third and Sri Lanka ranks 81. We didn’t rely on other countries to make us number three. We made the shift in public policy and the business environment to create an encouraging environment. Sri Lanka must do the same. It is like when you have a motor vehicle that is going fast; if you throw sand in the wheels and the engine, it will not continue to move at the same speed. A lot of government policies throw sand in the engine by having endless regulations. Entrepreneurs don’t want that. What they want is a free environment where they can operate.
Finally, there are smart people. Governments are lousy venture capitalists. It starts with a quality education, which Sri Lanka already has in place. But the important thing is for young Sri Lankans to see that they have a chance in creating the next Skype, Twitter or Facebook as opposed to creating it in India, the United States or the UK. If Sri Lanka is not attractive, then those people are going to go places that are. It’s a global competition for talent.
We live in a world filled with opportunities, but the dynamic world is demanding dynamic performance. So governments have to play their part and business and people need to do the same as well.
Q: We have seen many financial crises in the recent past. What do you think nations should do to better prepare for such situations?
A: First of all, countries have to behave themselves financially. Why have we got such international financial turmoil? America lacks a budget process. China lacks budget transparency. Fundamentally, governments have been unable to control their budgets in a responsible way. They are built by debts and entitlements that they can no longer fund. Eventually you get this terrible compounding of an economic crisis that produces a social crisis, which in turn leads to a political crisis. Countries that one would assume to be stable are facing a rise in nationalist sentiments because they are hit by the knock-on effect. Poor economic behaviour leads to political turmoil.
When I was in office, I pioneered the Fiscal Responsibility Act. That is now the international best practice how governments should budget in a more responsible way and New Zealand has one of the best fiscal records as a result of those rules. Applying fiscal rules and being very transparent about the state of the nation’s books is imperative. Any government that cannot observe that rule is a train wreck.
Q: So where does Sri Lanka stand on this regard?
A: Sri Lanka has a high budget deficit, high Government debt and high State dominance. Growth is going to be one of the ways in which the country is going to get out of these issues, but growth is not going to come from the Government as it is crowding out. The Sri Lankan Government has to play its part and get its books in much better shape. It should be more responsible as a household on managing the money of the public and must create a more enabling business environment for the private sector to take the growth initiative for Sri Lanka.
Q: Are you saying that the Government of Sri Lanka is controlling areas it shouldn’t?
A: Sri Lanka is going against the international trend. It is re-nationalising industries and there is no other country doing that. The Government is not good at business. That is not ideological; it is a statement of fact. The Government has critical roles to play, which is to maintain fiscal policy, to set the right environment for business transaction and to ensure rule of law. Those are critical roles they have to play. Not take the lead in the business environment.
It’s about trust. Internationally it is demonstrated that more the state occupies the economy, the least capable the economy is of growing in a dynamic way. It’s not about the left or the right, it is about what works.
The Government should understand that the motor of growth is the private sector. Sri Lanka will be signing an FTA with China. They have the most competitive regimes in the world and Sri Lanka has to match them. It is a global competition; therefore producers in Sri Lanka have to be highly able in every aspect of the business throughout the supply chain.
Q: You were one of the guiding hands for the reforms New Zealand went through in the 1990s. What are the typical challenges a country faces when it is going through such a process?
A: Nobody likes change. There is an expression that to make an omelette you have to break the egg. So everybody like the omelette, but doesn’t want to break the egg. Everybody wants a better economy, but don’t want to change the way of doing things. When a country gets in a position where they have not reformed for a long period, the shifts are significant. There is lot of social debate and political upheaval when you undertake such reforms. The issue is always the cost of staying as you are, versus the short term cost of going through the reform. The cost of staying where you are is irrelevant. So as a politician you want to say that ahead lie the prospects of a more sustainable series of economic arrangements and that is going to involve reforms.
There is a lot of evidence that states taking up reforms witness resistance, but the benefit and the dynamic you unleash in the form of reform makes it more than worthwhile. With reforms, budgets can be balanced, new opportunities for growth can be created and the economy can be widened.
Q: So what are the lessons other countries can learn from the reforms New Zealand went through?
A: There are three lessons that other countries can learn from us. First is that the budget has to be in order. Fiscal responsibility is crucial. If the government is not behaving in a responsible fashion in its fiscal policy, it is jeopardising the whole country.
The second is that openness is your friend. The more open a country can be to the economy, the more you are a friend of growth to the country. It would mean that some institutions will have to change. So there cannot be protectionism.
The third is that the institution that anchors all of this is rule of law. It is really crucial to develop the rule of law in a country. There are many countries that have not overcome the historical addiction to protectionism, cronyism and corruption. These are like cancer. It will eat away at the economy.
Those are the three lessons I think other nations can learn from New Zealand. So I would say that nations have to behave well in terms of public policy, open the economy to the world and should anchor people’s decisions with the rule of law.
Q: What do you think emerging nations such as Sri Lanka can do to ensure stability in growth?
A: The world is not about stability. The world is about continuous improvement and is about dynamic change. Stability is a nice world that brings comfort to a country. However, the only way to achieve this is by addressing the engine of growth, which is the private sector. If a nation does not have growth, it is going to compromise social stability.
Sustainable growth is not going to come from the government writing a cheque that it doesn’t have any more. The Government of Sri Lanka is so overextended that it is in so many areas and cannot handle its responsibilities properly. Sri Lanka does not want to surrender its decision making to external bankers. The Government wants to be in charge of decision making. The Government has only so much money to spend. If it doesn’t spend it wisely, then the entire country will pay the price.
Q: Sri Lanka has heard many mantras to avoid the middle income trap. How can the nation avoid this trap many countries have fallen into and progress to the next level?
A: Many nations do what China did. They come in, have an influx of growth, have early productivity gain and low wages and then move to the middle income, only to find a ceiling. So how does a country go above it? In my view the only countries that are going to go above the middle income trap are those that have rule of law and civic society, open competition between freedom of entry into economic and political systems and individual freedom to create an innovate.
Q: What is the message you have for Sri Lanka?
A: We are now living in a borderless world. The ability of people in any part of the world to make a splash on a global platform tells us that we are living in the most optimistic times. Sri Lanka has to look at what is standing between where it is now and the future. I know that economic reform is hard, I have done it.
The job of a politician is to transform and be fit for purpose and ensure that the people of the country are well placed to take advantage of the opportunities. These are tough days for the Government and they have to make tough decisions. It will be a real pay off when such decisions are made. Sri Lanka can do it, but needs to be in the process of change so it can be in step with new moments.
