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| Sunday, 31 October 2004 |
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Business |  |
| News Business Features Editorial
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Save for the future and save the nation ! by Lloyd F Yapa The government has wisely decided to enthuse all concerned to put their shoulder to the wheel to expedite development work by launching a development drive. The present socio economic situation is so precarious, that all should contribute to it, irrespective of their political and other affiliations in whatever manner. The purpose of this article is to indicate a few of the ways to join the effort . Why save ? Economic growth, either in the form of an increase in income, or employment or goods and services, is generated by investment in infrastructure and production capacity. Investment in turn is made possible by saving a portion of current consumption. National savings ie private savings of households and businesses plus the government budget surplus or minus its deficit have averaged only about 20% in terms of GDP in Sri Lanka, due to a number of reasons, mainly over- expenditure by the government. The policy statements of the government indicate, that it would work towards a medium to long term growth rate of 8% in real terms ( adjusted for inflation or in constant prices). Such a growth rate would entail the investment of the magnitude of over 30% in GDP terms. (It is estimated the high performing economies of South Korea, Thailand and Malaysia have been investing around 40% of GDP , a major portion (over 30%) of which has come from national savings). In other words there is a gap of more than 10% to be made up in respect of this country, either by domestic or foreign savings/ investment or both. Foreign investment could take the form of short term ( purchases of stocks and shares) and or long term (Foreign Direct ) investment flows. Foreigners are unlikely to invest unless the socio political environment here stabilizes significantly. Our dream of achieving prosperity therefore may elude us like a mirage. Here is a great opportunity for Sri Lankans ( composed of the government , the private sector and the general public) to join the battle to save the country from continued poverty by saving for future investment. Ways to contribute The government on its part has already announced the reduction of the present budget deficit of 8% to around 5% in the medium to long term. This is easier said than done. Forty percent of the people of this country are supposed to be poor, earning less than Rs. 1500/- or so per month, per person. The pressure for continuation of welfare in the form of free services such as health and education facilities, various subsidies and salary/wage increases, especially for the bloated public service is therefore enormous. However, it cannot be denied, that achievement of some saving by a certain degree of gradual rationalization of expenditure is not only possible but inevitable. The implementation of a strategy for such a reduction of government expenditure (mainly in respect of debt services, defence, subsidies and wages ) calls for a national consensus. What we find instead are irresponsible taunts, that wages and subsidies should be increased substantially as promised during the elections (knowing fully well inflationary pressures could spiral out of control and eat into purchasing power) and the adversarial stubbornness of certain parties to take even small steps to resolve the ethnic conflict . It is therefore up to civic organizations to step in and pressurize these recalcitrant delinquents to take some positive action in this regard. In the meantime, each individual could resolve to make an effort to save at least a fraction of current consumption, despite the compulsions to tighten belts further. Even the poorest of people incur a lot of unnecessary expenses on account of showing off to neighbours, family celebrations, smoking, drinking etc. Much money is also spent (in vain) on superstitious rites including mollification of various 'evil spirits' believed to be responsible for causing death, disease and destruction ! Adult education and exhortation may help to wean them away from such practices- here is a job for the media and interested civic organizations. As incentives also may induce people to save, the banks, insurance companies and the stock exchange could formulate some schemes for the purpose. They should primarily offer interest rates, which are higher than the rate of inflation, so that vulnerable groups like the poor and the retired will not lose purchasing power. The government could help by removing any taxes on interest earned. Business firms could join the fray by cutting costs and adding value. Trade unions could contribute by tempering their demands for wage increases and curbing unnecessary militancy against the establishment. This paper on the need for saving will not be complete without a word on the efficiency with which savings should be invested. Some of the most notorious spendthrifts in the world are none other than the Americans, their national saving rate being only around 17% of GDP. The Japanese are some of the thriftiest. Their savings (over 30% of GDP) have exceeded their rate of investment, which in turn has been almost double that of America ( the USA). Yet their growth rates in the last decade or so has been dismal, while America has recorded higher growth rates. The reason for this has been the higher rate of return on capital invested in the latter country due to the higher efficiency of its labour, product and capital markets, its unrelenting advances in science and technology and efforts for seeking out the most profitable projects for investment. This also partly explains the higher net inflow of foreign capital into the US, (besides its high level of social and political stability). There is a lesson in this for Sri Lanka. We have to carefully remove unnecessary State interventions in our markets like our rigid labour legislation, price controls on goods and services, which prevent the determination of (internationally competitive) wages and prices - on the basis of market forces of supply and demand and emphasize on R&D as well as expansion of higher skills, while saving as much as possible, in order to realize higher growth rates. So fellow citizens, here we have a few high impact ways to join the development drive. |
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