The basic problem with the government in power from 2009 to 2014 was the concentration on developing a domestic economy-based economic system. It could raise the growth initially to a high level but failed to do so continuously due to the small size of the domestic economy. Hence, the economic growth began to fizzle out and by the time the new Yahapalana government came to power in early 2015, the economy had gone deep down in the drain
Everything is economics
This is the 500th article in this series. Started in January 2011, it appeared on every Monday without failure over the last 10 years. Many have been puzzled by its tagline, ‘Economics Matters’. What it means is that everything under the Sun, or for that matter even that is above the Sun, could be explained in terms of economics. It does not matter whether it is economics proper, politics, history, religion or art. They are all subject to laws of economics.
Addressing the ordinary laymen
The objective of the series was to present contemporary issues in simple language to ordinary laymen. Thus, its readership mostly consisted of those outside the standard economic profession. That included medical doctors, engineers, artists, bureaucrats, and of course, the ordinary people. It did not mean that it had kept professional economists out. Many of them including those at the IMF, World Bank and universities in Sri Lanka and abroad took time to correspond with me on them. Some had agreed but many had dissented. That is the real nature of any art or science because either one progresses not by consensus but by questioning and disagreement. Economics is a prominent art as well as a science that is governed by this rule.
Explaining economics without mathematics and tech terms
Since professional economists were not the immediate target group, the presentation style, language and analysis contained in the articles deviated substantially from what one would find in scholarly papers on the subject. Thus, to make them palatable to ordinary readers, they were presented free of mathematics and technical terms. It itself is a challenging task. That is because the general belief is that economics cannot be taught without mathematics or technical terms.
It is pragmatic economics and not for any dogmatic school that I stand for
What did I stand for in these articles? Was it neoliberalism or capitalism or socialism or any other ‘ism’ that has caused economists to divide themselves into fighting groups? Nothing of that sort. I stood for economics in its fundamental form based on a pragmatic stance. In this form, genes of all species have been programmed in accordance with basic principles of economics.
Take just one example relating to modern humans: They crave for food but foods are scarce. Then, the economic laws start operating. They first compete with each other for the limited availability of foods. Then, competition is extended to other species. If rats are eating grains, they are exterminated. The same treatment is extended to pests that reduce the grain output. If weeds pre-empt the absorption of the fertility in soil and invade fields, they are also exterminated to prevent a fall in the grain output, the source of food.
Craving for land is a craving for foods
Then, the competition goes for land on which foods are grown. When modern humans were hunter-gatherers some 40,000 years ago, they fought with rival groups for hunting grounds, the land mass. When they became agriculturists some 10,000 years ago, they fought with each other and with rival groups for arable lands. That is because land gives food security and if lands are not there, they are denied of foods too. Thus, land is a part of their genetic build-up. Therefore, it is easy to arouse people on the ground of land rather than on any other ground.
This was seen in the last Presidential and Parliamentary elections in Sri Lanka. When people were told that Americans and companies sponsored by them were going to seize lands in the country under a development aid package called Millennium Challenge Corporation or MCC Compact, everyone, irrespective of age, social status or educational level fell for it. When this was repeated ad nauseum by some members of intelligentsia, the genes inside people got worked up and it was largely responsible for the outcome of the two elections.
Selfishness is compromised in social living
What this means is that human beings are selfish and that selfishness helps them if they live alone. A man living in a cave in the jungle has only one concern. That is how he could fill his stomach. He has no other considerations, say justice, human rights or freedom. But when he is organised as a member of a society, he cannot have those extreme goals without harming others. So, the total welfare of society will depend on each person sacrificing a part of his selfish goal for the betterment of others in society.
An economist is a mechanic with different tools
All sub branches of economics, like capitalism, socialism, liberalism, neoliberalism or social democracy have sought to resolve this paradox: that is, how to get the selfish individuals to work for the betterment of others. Each school, based on its own reading of individuals and their behaviour, has proposed its prescription for resolving it. When one is deeply attached to a particular school, one loses sight of the bigger picture and fails to correctly diagnose or propose effective medication.
Today’s economists should be like a mechanic with a tool box containing many types of tools. When faced with an issue, the pragmatic mechanic will try out with one tool and if it does not work, will select another tool. This process will be continued until he finds the correct tool to address the issue at hand. However, an experienced mechanic will be able to select the correct tool in the very first instance without trying out various tools to resolve the issue. An experienced economist will also find the correct tool in the very first instance of facing an issue.
This was what I stood for in this series of articles dedicated to providing material for ordinary readers to appreciate and understand complex contemporary issues that could be explained from a point of economics.
Economic mess in Sri Lanka
Sri Lanka’s economy today is in a deep mess. Even after seven decades of independent rule, the country has not been able to push itself up to the level of a rich country. Over the entire post-independence period, the country had had a meagre economic growth of about 4.5% on average. That was pretty below the growth rate of 9% needed for raising the country to the status of a rich country within a few decades. Hence, all governments in the post-independence period are responsible for this malaise.
Today’s mess started in 2013
Beginning from 2013, over the last seven-year period, the situation further deteriorated. Symptoms were manifested by falling growth rates, stagnant exports, mounting external debt, rising recourse to commercial borrowings, falling in government revenue, stubborn budget deficits, stagnant capital formation, high inflation though at mid-single digit level over the world inflation and pressure for exchange rate to depreciate. These unsavoury outcomes were highlighted by me in this series of articles continuously. The objective was to permit economic policy makers to take note of these developments and adopt immediate corrective action. However, the response received was an angry denial and retort.
The basic problem with the government in power from 2009 to 2014 was the concentration on developing a domestic economy-based economic system. It could raise the growth initially to a high level but failed to do so continuously due to the small size of the domestic economy. Hence, the economic growth began to fizzle out and by the time the new Yahapalana government came to power in early 2015, the economy had gone deep down in the drain.
Failure of the Yahapalana Government
But the Yahapalana government failed to arrest it and make a turnaround. From the very beginning, the government did not have a policy direction. It was concentrating on introducing constitutional reforms which was also done only partially. Economy and its problems were basically ignored. Taking note of the aggravating foreign exchange situation in the country, I advised the government in this series that they should seek IMF support.
But its leaders made bold statements that they would not surrender themselves to the dictates of international bodies like IMF or the World Bank. Going forward in the wrong direction, its Minister of Finance even promised to stabilise the exchange rate by getting some $ 3 billion from a well-wisher investor from Belgium. When I cautioned the government in an article in this series that it would not work because it smelled of money laundering, the warning was ignored. That money was never received and the foreign exchange problem became acute pushing the exchange rate further down. When the government sought IMF assistance later, it was too late.
Policy discord within Yahapalana government was the killer
There was policy discord also in the Yahapalana government. The Prime Minister made an economic policy statement or EPS in November 2015 just two weeks before the budget for 2016 was to be presented to Parliament. That policy statement outlined the economic policy philosophy of the government. His Finance Minister was supposed to incorporate it into his budget and come up with a short to medium-term plan for its implementation. But the budget had not been fully aligned to EPS and its goals.
Budget and EPS going in two directions
I presented this in four articles in this series and emphasised on the need for making a complete turnaround in the budgetary policy if the government is to realise its targets. One glaring misalignment was the failure to lay the foundation for the realisation of the overall budgetary targets in the medium term. EPS had envisaged to change the tax structure with more emphasis on income taxes. It had even set a quantitative target of attaining 40% of the tax revenue from income taxes by 2020 as against the historical average of 20% on that count.
This required the Finance Minister to design policies to reduce the share of indirect taxes from the present 80% to 60% over the years. But the budget had increased indirect taxes from 80% to 87% and reduced the share of direct taxes from 20% to 13%. I cautioned the government that necessary changes in the budgetary policy had to be made immediately if the goals of EPS are to be realised. But this warning was ignored and EPS became just a wish of a Prime Minister.
A naive attempt at inflating budget numbers
There was another howler made in the budget for 2016. That was pertaining to the education and health votes. In an unprecedented move, these two votes had been arbitrarily inflated by adding an imputed rent of Rs. 139 billion for the state buildings used. A contra entry had been made on the revenue side by adding it as non-tax revenue. This was against the guidelines in the Government Finance Statistics Manual under which the budgetary numbers should be presented. This howler was pointed out in an article in this series requiring the Yahapalana government to make the necessary corrections. But there was no response from the government and it was corrected only in the budget for 2017.
Stubborn stand on Treasury bond scam
Similarly, the disastrous Treasury bond scam was also brought to light by me in a number of articles in this series. Immediately after the first bond scam of 27 February 2015, I wrote that the bond explosion made a far greater damage to the Central Bank than the bomb explosion that took place in 1996. The objective was to enable the Yahapalana government to take immediate corrective action. But the government not only ignored it but also invested its whole energy in a great coverup operation. It led to a series of subsequent bond scams about which the entire securities market was angry with the government.But with each passing day of government’s coverup, its hand in the scam was more visible.
My articles in this series, warned the government about the likely disaster that would befall on it. But the government did not listen and it was driven into a deep mire day by day. Had the government listened, it could have avoided the disastrous electoral outcomes it had experienced in a series of subsequent elections.
A man-made constitutional crisis
The man-made constitutional crisis of October 2018 was the subject matter of six articles published consecutively. The economy had already been going down in the drain and the crisis had worsened it. I warned that unless the crisis was resolved quickly, there would be an irreparable damage to the already worsening economy. I said: “Against this background, if the country is hit by a constitutional crisis where there is no government or if there is one, a weak government for that matter, the economy cannot recover from the depth to which it has fallen. The longer the crisis, it is worse for the economy. Hence, it would worsen the present economic crisis”
It was further argued: “It is an instance where the economy has been subject to ‘double prejudices’, the first being the slowing down of the economy and the second, the reinforcement of that trend by the on-going constitutional crisis. This is, as the local proverb says, like the man fallen from the tree is being attacked by a bull as well. Who is to suffer at the end? It is the people of Sri Lanka who are already frustrated about the country lagging behind even those which had been below it a few years ago. The most often quoted examples are Vietnam and Bangladesh which are presently moving ahead of and faster than Sri Lanka.” But the two warring parties did not listen and instead, stepped up the onslaught on each other. It was a fight to a finish. That fight drew the nails into the coffin in which the dead economy had been placed for burial.
Current budgetary crisis is also man-made
In a series of articles, the budgetary crisis created by the offer of generous tax concessions to both income tax and VAT payers by the new government was highlighted. It was pointed out that it would cost as much as Rs. 600 billion to the Treasury by way of lost revenue in 2020. The budgetary numbers during the first half of 2020 have proved this projection. These concessions had been introduced by the government as the preliminary step to simplify the country’s tax system which was a must. But it could have been done step by step without creating a budgetary crisis.
Resorting to costly bank borrowing
The loss of revenue had been replenished by the government by borrowing from the banking system. During the first seven months of the year, such borrowings on a net basis, that is, gross borrowings minus government deposits with banks, had amounted to a staggering Rs. 1.4 trillion. This has been done at the cost of lending to the private sector which has increased only by Rs. 454 million. To correct this anomaly, it was suggested that the government should immediately go back to the pre-November tax system. Like the previous Yahapalana government, these warnings are being ignored by the present Prosperity government too.
These are just a few selected areas that I have covered in this series. But as mentioned above, there are many more, covering art, movies, book reviews, profile expositions, social and religious issues, etc.
Providing economic wisdom to people for 10 years unabated is a real achievement. We will continue it with the same tempo and vigour in the future too.
(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at email@example.com.)