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| Sunday, 5 September 2004 |
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| News Business Features Editorial
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Are we serious about Economic Development? Prof. Jagath Wickramasinghe, Professor of Economics, University of Sri Jayawardenepura Major causal factor of economic growth and development is investment. Expected impact of investment is expansion of the productive capacity of the economy. Both economic growth and development need increases in per capita income, which is generated mainly by investment by expanding the productive capacity. Resources for investment have to come either through domestic savings or from foreign savings in the form of loans, grants, aid and surpluses in the trade account. One could ask the question why a government cannot print money and invest so that economic growth could be achieved with little burden to the ordinary people. When the government print money beyond the level of increase in the availability of goods and services, so called real sector of the economy, and invest, money supply in the economy increases faster than the increase in the supply of goods and services, a situation of " too much money chasing after too little goods" resulting in increases in the general price level. This is called an inflationary situation. This inflationary situation creates distortions in the economy; mainly reducing domestic savings, reduce export income and increase expenditure on imports and also transfer income from productive sectors to rent seeking sectors such as real estate sector. Wage earners real income, ie, quantity of goods and services that could be purchased from a given salary, reduces. All these bring in extra pressure on our rupee and results in depreciating its external value, further exacerbating the situation. That is why governments are reluctant to print money and invest beyond a certain limit. Another option available to government is to borrow money from the commercial banks and invest. There too, the situation is more or less the same. When the government or for that matter any body borrows money from a commercial bank that loan will get into the money circulation of the economy without corresponding increase in the supply of goods and services, resulting in an inflationary situation. The commercial banks can create money and hence they can lend exceeding the value of deposits made by the public, a situation similar to printing of money by the Central Bank and exacerbate the existing inflationary situation. Accordingly, the two avenues available for the government to increase investment without creating a serious inflationary situation are foreign resources in the form of loans, grants and aids and domestic savings. However, normally such foreign gestures are associated with "strings" in the form of interference with our domestic economic policies for allowing such foreign resources. That is the price we have to pay for relying on foreign resources for our development. Any way, some percentages of foreign resources are indispensable for rapid economic growth. But too much reliance on foreign resources for our development effort is not very conducive for our own long-term development effort. Then only option is national savings. However, saving rates in Sri Lanka has been very dismal since independence. We have been a nation of "lotus eaters". In the latter part of 1940s, at the time of independence the consumption rate was 95% of the disposal income. That means the saving rate was only 5%. It is only in few years national savings rate exceeded 20% of the GDP, ie first time ever 22.2% in 1984 then 1993 20.2%, four years from 1997 and 2003. As far as domestic savings is concerned there was hardly any year in which its value rose above 20%, highest ever value was 19.9%, which was achieved in 1984. These ratios are very much lower than those of far eastern countries whose average savings ratio exceeds 35%, and even our neighbour India, ratio exceeding 30% although her per capita income is much below that of Sri Lanka. China has managed to maintain very high savings ratio exceeding 35% and Japan even higher exceeding 50%. The major contributory factor for low national saving rate has been the deficit in the recurrent account of our government budget. This means government has to borrow to meet its day-to-day activities, which is a very serious situation. In the early part of the independence up till about the middle of 1970s the government welfare expenditure was mainly responsible for this situation in few years, though this deficit in recurrent account was rare. However, inspite of "cut to bones" of this welfare expenditure after 1977 the dismal situation remained more or less unchanged. Investment is no better. During the early period more than 90% of investment was financed from domestic savings. As a result investment ratio too was very low. It was only in one year that the investment rate exceeded 27%. On the whole investment rate remained between 15-23 percent. Prior to 1977 about 90% of the investment was financed by domestic savings later that situation changed considerably. Although foreign resources have become a significant factor of investment after 1977, the investment rate has not increased considerably. That is why our growth rate has remained around 5% over the years. If we are serious about economic development we need to increase our saving rates rapidly by cutting down consumption. Elite 10% of the population is suffering from obesity and lowest 10% is malnourished. This wicked system must be scrapped and make the elite to cut down expenditure on consumption. If the government has the political will to transform this unjust system and get the savings ratio high within a short period of time precondition for rapid economic growth can be laid down. Unless we get our savings ratio above 30% of the GDP enabling the required rate of growth to exceed 8% per annum, reaching a rapidly developing country will be only a dream. |
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