Bold reforms will put country on right track - Dr. Abeyratne

by Gamini Warushamana

Cheap welfare packages offered as bribes in election manifestoes are not realistic or practical and place a massive burden on the government. Both parties indulge in this and as a result the country has fallen behind other developing nations in the region and the world, Economics Professor, University of Colombo, Dr. Sirimal Abeyratne told Sunday Observer Business.

Excerpts:

Q. Many changes have been taking place in the political arena since the fourth quarter of 2014. Political stability which is crucial for sustainable economic growth was not visible. Now that a new government has been formed how do you see this change influence the country’s economy?

A. The main reason for Sri Lanka lagging behind in economic development is the lack of consensus among political parties. There are plenty of examples and both main parties use petty issues to grab power ignoring real issues.

A good example are the cheap welfare packages offered as bribes in election manifestoes which are not realistic or practical and create a massive burden on the government Budget. Both parties do this and as a result the country has fallen behind other developing nations in the region and the world.

Therefore, a broad consensus on the main issues based on long-term economic policy will be good for the country if they truly honour the agreement. Such a consensus would help the nation prosper and politicians personally. But if this is another ploy to secure power we would see history repeating itself.

Political stability and stable long-term economic policies are essential for sustainable economic growth. The country is facing a challenging situation and, therefore, a consensus is the need of the hour. If stability continues, we will see positive economic development over time.

Q. UNP-led governments have always followed market-friendly policies. However, today, although the government is led by the UNP, there is a coalition which consists of political parties with different policies and political agendas. This is a complicated situation. Do you think that this government can follow market-friendly policies in the present situation?

A. Through decades of experience after the Second World War, there are several documented reports of prosperity.

First, it is accumulated private capital and its reinvestment which produces higher output and higher income.

Second, the global market gives us business opportunities. The market itself poses challenges to business thereby guiding the private sector to be constantly competitive and efficient. Third, the government has the legitimate power or ability to facilitate or obstruct the process.

Today, with this global understanding, developmental thinking is less complicated. Wrong policies, doctoring or criticisms are no longer valid. If the people or political parties joining this government cannot understand these realities, delivering the promised economic growth and prosperity will be a challenge. Therefore, there is no room to create complications and complexities by those who have private agendas.

Q. Today, the UNP is also talking about a social market economy, a diluted version of the neo-liberal policies it preferred earlier. What are the reasons for the alteration of economic policies by the UNP? Is it the political situation in the country with weaker parliamentary power or global changes in economic policies where governments are compelled to address issues of marginalized people and invest more on social welfare?

A. I don’t see a contradiction in the two sides, market economy and issues of marginalized groups and social welfare investments. A market economy generates resources and opportunities for governments to invest in social welfare. On the other hand, social welfare investments improve peoples’ ability to participate in the market economy efficiently and effectively and, therefore, it can enhance the market economy.

Lack of attention to the social aspects of economic development leads to market failures. However, the government’s intervention should not hinder the functioning of the market economy. Our own history confirms this. Ignoring social issues or imprudent or unrealistic approaches to address such issues has indebted our nation and increased the vulnerability of the economy. Generations have to suffer as a result of these mistakes.

The government has to take hard decisions to achieve future prosperity and address past mistakes. Long-term vision, political will and an enabling environment are the ingredients to achieve this.

Today, the enabling environment is more complicated. It depends on a broad political consensus and demands of civil society. Awareness and education can improve the enabling environment while some other parties can spoil it.

Q. Most of the liberal economists expected crucial structural reforms of the economy by a UNP-led government. Can it be expected from the present government?

A. To take the economy on a sustainable growth path, three aspects have to be taken into account and there are several changes that are needed in these areas which can be considered as reforms.

First, we have to rebuild our production capacity. For that we have to restore investor confidence. Our investment ratio, which is less than 30% of the GDP today, should be increased to over 40%. It should come from the private sector because government investment has already reached its limit and cannot be increased further without increasing the already high debt burden.

To build investor confidence, we have to develop our human resources to make it a globally competitive labour force. Our leap forward in economic development depends on human resource development.

It is essential to reform State-owned enterprises. If we cannot make them efficient through reforms they would affect our competitiveness, drain public resources and create a tax burden.

Second, there should be improvements in government finance. Today, our total tax revenue is less than the annual expenditure on debt service. In 2014, the cost of debt service was Rs.1,076 billion and total tax revenue Rs.1,050 billion.

This means, all the other government expenditure have to come from further borrowings. Our total debt is over 700% of government tax revenue which is similar to the situation in Greece. In these circumstances, there is no easy way out and hard decisions have to be taken to improve the situation.

Third, our external financial situation is bad and our exchange rate very fragile. We have been managing due to remittances by expatriate workers and foreign borrowings. Both are not signs of prosperity but of misery.

This year we are lucky due to two reasons, the crude oil price has fallen by nearly two-thirds and the Indian currency SWAP of US$1.5 billion. Therefore, we will manage our exchange rate temporarily but we need a sustainable solution to resolve this issue. For this we need reforms to replace Middle East remittances with export growth and high revenue and government borrowings with foreign investments.

Q. What is the main challenge the new government faces in boosting economic growth and prosperity as stated in its election manifesto?

A. The main challenge before the government is to work on the discarded word ‘reform’. The government must introduce bold and purposeful reforms without delay to put the economy on the right track. However, there are anti-reform parties within the government.

On the other hand, former President Mahinda Rajapaksa is in the Opposition with significant power to obstruct such reforms. The former President should understand the need for reforms because it is urgently needed not only for the future but also to correct past mistakes made mainly during his tenure.

Before 2009, the war was the main reason for economic issues. After the war ended due to the absence of clear policy direction and an adverse political environment we missed the opportunity. Today, somebody has to correct it or go on the same way as before, but not towards prosperity.