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| Sunday, 28 November 2004 |
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Budget 2005 : A serious attempt at poverty alleviation by Lloyd F Yapa The maiden budget of the UPFA government makes a determined effort to respond to the desire of the people to banish poverty and achieve prosperity. In fact the government has set itself an economic growth target of 6-7% per annum in the median term or 3-4 year period. It has also gone to great lengths to translate its election promise of alleviating poverty to implementable programmes with voted funds. Few governments since independence have attempted this task with such commitment and seriousness. Growth target The Minister of Finance estimates, that a rate of growth of 6-7% requires a level of investment ranging from 30-40% of GDP ( about Rs. 700- 900 billion p.a.). He states, that investment so far has averaged only around 25-28% of GDP. Without growth (to counter inflation) the desire of the people to lead a life devoid of poverty could remain a distant dream. The challenge in this connection is to think big, hit the higher investment target for about three decades and achieve an average growth rate of about 8% p.a. to wipe out poverty and join the league of first world nations, as demonstrated by Singapore. The moot question then is who will come up with the balance investment to create jobs and increase production? The envisaged plan The major reason for our inability to attract the required level of investments has been the absence of stability. Even economic stability in the form of a stable level of prices has eluded us due to the deficit budgeting practices adopted by governments and the inability to manage factor markets (land, labour, capital, foreign exchange etc) to ensure an international level of competitiveness. One way of reducing the debilitating budget deficit is to increase revenue. In this budget the government has taken the very commendable step of doing so by expanding its tax base. However, it appears, that a sizable deficit will continue as the government has been compelled to continue to throw good money into the seemingly bottomless pit of wages, defence, untargeted welfare programmes, subsidies and of course for servicing its massive debt. The government has wisely erected barriers against the consequential inflationary pressures by reducing the levies on essential imports, ( while increasing those on non essential varieties, to earn additional revenue and conserve scarce foreign exchange). In addition it has launched a massive programme to increase production, especially essential food items, supported by incentives and infrastructure development, ( though the required large scale power generation, port and airport development projects are not mentioned in the budget), financed by a welcome (though small) increase in public investments to 6.4% of GDP, which will also address particularly the need for enhancement of the quality of health services and the level of skills through reforms in education . It also plans to keep interest rates low to encourage investors. The public service, which will be responsible for the implementation of this plan, is to be revitalized with rationalization of functions, training programmes and some overdue incentives. Areas for attention Several areas of this plan of development envisaged in the budget 2005, well rounded though it may be, may need the special attention of the planners and the policy makers: 1. The development programmes will begin to generate goods and services only after a gestation period of 1-2 years. The salary increases and the welfare programmes will, however, result in an increase of disposable (cash) income by the beginning of next year. This money will chase after the limited quantum of goods and services available and may create inflationary pressures followed by further depreciation of the currency. If this happens, the poorest of the poor and those depending on interest income may continue to suffer- the latter due to the low interest regime envisaged. Inflation may have to be curbed by limiting the expansion of the money supply and reduction of public expenditure on unproductive welfare programmes and subsidies, leaving a well- targeted safety net for the most vulnerable groups in society. 2. Most of the eggs seem to be in the SME basket. The mortality rate of SMEs is very high due to intense competition among themselves with similar products. They would be protected from this tendency to some extent by the higher import tariff, which will emerge due to the new levies. Protection, however, may make them sluggish and quality may suffer, while prices may rise with costs. Their ability to command premium prices and obtain higher returns by improving productivity, differentiating products and establishing brand loyalty is limited due to the absence of well funded R&D, extension and competitiveness improvement programmes (eg corporatization, clustering). The question therefore is whether it is realistic to expect substantial growth from this sector, unless the SME Bank and others concerned rise magnificently to the occasion, as in Taiwan. 3. The proposed grants for exporting firms could be disbursed in such a manner as to enable them differentiate their products and services (in order to earn higher returns) to avoid falling afoul of any World Trade Organization (WTO) provisions on subsidies. They may, however, invite price discounting demands. In any case extension of new incentives and elimination of disincentives alone may not result in a substantial expansion of export production capacities. 4. The implementation of the State driven programmes envisaged in the budget will need a very high level of efficiency from the public service. It may not be forthcoming, despite the incentives offered, unless its functions are rationalized, its bloated proportions are trimmed to size, it is freed from political interference in its internal affairs and strategically managed for delivering speedy results. Thus, there is a question mark over whether these programmes could yield a growth target, that is high enough to eradicate poverty within a couple of decades . A dynamic programme of attraction of FDIs for large scale infrastructure projects and for export of differentiated products may have to be implemented, in addition to the SME programme, as the State (and even the local private sector) do not possess the necessary funds, nor the technologies, the expertise and access to external markets. The FDIs cannot be enticed by incentives (alone), which anyway are expensive. Political and economic stability, good infrastructure, a high level of skills, good employer- employee relations, an effective justice, law and order system, an efficient/ incorruptible public service etc are the instruments to be used for this purpose. Adoption of this approach requires abandonment of ideology and consensus and commitment among stakeholders. |
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