Harsha on dealing with discrepancy and building an equitable social market economy
Tuesday, 24 February 2015 00:34
By Charumini De Silva
Policy Planning and Economic Development Deputy Minister Dr. Harsha de Silva last week addressed a top group of marketers at the CEOs Forum organised by the Chartered Institute of Marketing (CIM) Sri Lanka.
Dr. de Silva focused on three main sections — past, present and future – and the Q&A session which followed saw several issues being scrutinised.
Commencing his address on a confident note, he said: “I will try to give you a flavour of what our Government’s plans are for the next five to 10 years because we are very confident. The more people we see in rallies like in Nugegoda, our level of confidence increases. Essentially, what we believe is that everyone has a chance. They deserve a chance and they must be given an opportunity. The Government must do what they must do, to ensure that everyone gets that chance. You work hard, you play within the rules, you must get ahead; that’s the fundamental principle of capitalism and we are capitalists. The Prime Minister was telling me the other day, ‘Don’t forget Harsha, whatever you do and say, don’t forget that we are capitalists.’ The UNP has not at all changed its position from its beginning, it’s only going to be more ‘people-friendly’.”
Asserting that Sri Lanka has done well, he added that there was no need to criticise everything that was done in the past and that this went back to the days of D.S. Senanayake all the way up to former President Mahinda Rajapaksa. “They all tried to make Sri Lanka a better place. We have no problem in acknowledging the fact that former President Mahinda Rajapaksa gave the political leadership to win this war and we take our hat off. The question or the issue that we have with the previous regime is that they were unable to deliver the goods to the people of this country,” he noted.
“If you look back at the last six years, where we have data available from the 2006/7 to 2012/13 Household Income and Expenditure Survey, it is very clear that this economic policy failed. By and large the people of this country, households which you marketers are interested in, didn’t really feel the dividends of growth. For instance, inequality in income remains; in fact it had gotten a little worse. The bottom 50% share 19% of our income, the top 10% share 40% of our income and that’s how this pie is divided. Nivard used to talk very glowingly about GDP per capita income of $ 4,000 which makes absolutely no sense because what you as marketers want is not the total GDP divided by 20.6 million people, but the purchasing power of the household. The purchasing power of the household as per the previous survey, which is the most current, it is only Rs. 11,900 per person. A lot of people don’t really understand income is not just the wages. Wages in that income may be slightly less than 50%. So, the money that you have in your wallet is about Rs. 6,000 per month on the average. This is not UNP data, this is from the Census and Statistics Department,” he stated.
"What we believe is that everyone has a chance. They deserve a chance and they must be given an opportunity. The Government must do what they must do, to ensure that everyone gets that chance. You work hard, you play within the rules, you must get ahead; that’s the fundamental principle of capitalism and we are capitalistsIn any country there is always a discrepancy because all profits are not distributed among shareholders. However, the discrepancy is unacceptable. The way divergence is taking place is unacceptable"Massive discrepancy
Commenting on the key issue of discrepancy, Dr. de Silva highlighted how he tried to raise these issues within and outside Parliament. “According to the data we have, the country grew by 7.5% because we built roads, ports, towers and various things. Real household income, which means after inflation, grew by only 0.5% per annum. Now you see the discrepancy is massive! You have a country that has grown at 7.5% and household income growing at 0.5% (after inflation). So, what is the big difference? Why is that discrepancy present? In any country there is always a discrepancy because all profits are not distributed among shareholders. We want to create a shareholding democracy. Everybody should own shares in big companies, they must contribute to growth and benefit from that growth. However, the discrepancy is unacceptable. The way divergence is taking place is unacceptable.
“I saw a recent World Bank document, which broke the six years period into two to three year periods; what you saw in the first three years, growth in the low income people was greater than the average and the rich people’s income growth was less than the average. Then after the war, you saw some very interesting dynamics where poor people’s income growth was way lower than the mean and the rich people income growth was way over the mean. So, it completely got turned on its head.”
Referring to a bathing well project done by the previous regime, he said; “I inherited Minister Basil Rajapaksa’s files. Whenever I have time, I pick one up and go through it for amusement purposes. There was a village wells repairing project. It roughly costs Rs. 30,000-40,000 and at the very most Rs. 50,000, but they have spent Rs. 500,000 a well. They have spent Rs. 500,000 just to repair and not to dig. So the people who worked on that repair such as the mason, the helper and so forth end up getting about Rs. 5,000 and that is what’s reflected in the household income, but the country is growing at Rs. 500,000 a well. That’s the discrepancy which needs to be fixed.
“On the other side, people needed to be free. There is the opportunity for people to come and talk to us and people feel that freedom. I think already, even if we haven’t done anything and even if we have to go home at the end of 100 days, I don’t feel too bad because we have given people freedom from the near dictatorial regime we had and we were going in a direction where it was curtailing the rights of the people, democracy, rule of law and so forth. In the last few years, distribution of wealth and sharing of income was taking place in a way we believe is wrong and we are trying to fix that,” de Silva stressed.
Unsustainable growth path
Elaborating on the current status of the economy, the Deputy Minister said that in the present context of the economy, Sri Lanka is on an unsustainable growth path.
“I say that not only as a politician, I say that as an economist. Because if you just start looking at the books of the Treasury, how can you do some of these projects? Interestingly National Planning comes under us now, we created a new unit under the Prime Minister on one hand and we also have the financial sector. Talking to these guys, how can you put up an airport in the middle of nowhere? So, there’s no real plan; okay the ‘Mahinda Chinthana’ was there. But what is our National Development plan? What are the priorities that we as a country are trying to follow? What do we need to put our money in? The growth numbers are not right. As marketing people if you are have been trying to keep up with the growth numbers the Central Bank was putting up, now you can relax because you probably did better than the actual growth of Sri Lanka.
“I’ve been saying that the people were not paying taxes and that taxes have fallen to 11% of GDP. I think once we fix the actual GDP numbers, the tax to GDP ratios might go up to 14%-15%. Then the debt issues are enormous and some of these agreements are just unbelievable. The terms of the tenure was renegotiated not in our favour, but in the lender’s favour. For instance, the Hambantota Port I phase of $ 306 million from EXIM Bank of China, if it was not negotiated we should be paying 1.3% today but instead we are paying 6.3% and we are fixed for 6.3% for the next 12-13 years. I don’t understand why such changes were made. When I was in the Opposition, I was one person who kept asking these questions. I don’t want to make a big issue because at the end of the day we are in Government and we need to manage our relationships with creditors and rating agencies and all that. As marketing people, you realise that we don’t wash our dirty linen out in the open,” he said.
"What is our future? What is our vision? Are we going to get stuck with a bunch of countries and not be willing to have business with others? Or are we going to be friends with the people who matter to the people of this country? Economic policy is a part of foreign policyDon’t worry, take decisions, we are going to come back in 100 days. Just keep going and meet your demand. In the future, we are determined to create an equitable social market economy, where there is justice. Help us build a Sri Lanka for all"
He also highlighted certain economic issues that most believe do not exist, noting that there were many concerns which need to be addressed without creating trouble for Sri Lanka as a nation. “All these leads to macro level, like what’s going to happen to the exchange rate. Cabraal used to say we had $ 9 billion reserves, but look at the non-borrowed reserves; how much do we actually have? It is negative. If that is the case, every dollar there is what we have borrowed. We have taken a decision that politicians need not dictate terms to the Central Bank and the Central Bank must not become politicians. Those two things should be mutually exclusive. The Central Bank is there to ensure price stability and financial market stability and to give ‘independent advice’ to the Government. Otherwise where is the independent umpire? Sri Lanka is facing multiple issues currently.
“Economic governance was another big issue, which I am sure held back FDI flows. We feel bad that the nation is only getting $ 1 billion as FDI. We have not been able to attract the kind of FDI that we should. There is an interesting story on how VW wanted to come here but couldn’t for the last four years.”
Dr. de Silva said the issues Sri Lanka is currently facing are quite enormous from a technical point of view and need to be sorted out. “What then happens to interest rates? You as businessmen want the interest rates to remain low. But if there is pressure on the exchange rate, what do we do? Depreciate the exchange rate? Or we increase the interest rate? We have limited levers to work with, limited instruments, so in the next year or so we have to be very careful in trying to put everything right. Finance Minister Ravi Karunanayake is in Washington DC, we have been talking to various international or multilateral donor agencies and hopefully we will be able to bridge the gap without causing trouble for the private sector. It is in that context that the election took place.”
Noting that they inherited an unsustainable economy, he added: “We got into a huge argument on how much Sri Lanka’s external debt is. The Central Bank put out press releases and kept hammering us in the newspapers that Sri Lanka’s external debt was 31%, but I said it is 62% and let me tell you it is 62%. You can’t window-dress every day. There’s no point in trying to shift from the Treasury to the CEB or the Water Board when they are both fully State-owned entities. You can’t just drop it; that debt we pay and you pay! According to classifications by international agencies, we are a highly-indebted country.”
Stating that as a result Sri Lanka was becoming an isolated nation facing international punitive action, Dr. de Silva said: “Now if you look at the 100 days, going forward we’ve been able to move from that. Even if you look at the UNHRC matter, we were able to talk to these guys and buy time and in that time we will show them we have made real progress. Nobody’s going to send Mahinda Rajapaksa anywhere, that’s absolute nonsense. All what we want to do is come to some agreement with the international community. Once we come to an agreement with the international community, we can go on. So, there is always room to negotiate with anybody. If you can negotiate with your wife, you can negotiate with anybody! It is where you want to go.
"We have taken a decision that politicians need not dictate terms to the Central Bank and the Central Bank must not become politicians. Those two things should be mutually exclusive"
“What is our future? What is our vision? Are we going to get stuck with a bunch of countries and not be willing to have business with others? Or are we going to be friends with the people who matter to the people of this country? Economic policy is a part of foreign policy. You cannot have economic policy on one side and foreign policy on another side. From our actions in the last 30 days you will see that we have already spoken with the Indians, the Europeans. I’m in serious discussion with the EU in getting back the GSP+. First we need to get over the fish problem. If we have the fish back, we can go for the GSP+. When I checked on the fish matter, would you believe that they took five years to procure the vessel monitoring system? We are going to China next month, the Chinese have been here. This Government is not going to fight with anybody. We will be friendly with everybody. We have to be a responsible government. Don’t forget that it was the UNP that signed the first agreement with Chinese. We have a strong relationship with the Chinese and we are immensely grateful for all that they have done for us so; those relationships will continue.”
Social market economy
Relating the Prime Minister’s long-term vision, he said: “At our National Convention in 2012, Ranil Wickremesinghe came up with a radical statement, in that he talked about ‘social market economy’. The word has taken its twists and turns and what we really mean are two pillars – competition and social justice. What we are trying to create is an economy that is highly competitive and ensures social justice to the citizens of this country. In three short factors, one is we believe in markets. The question is to create efficient markets and we have to make the markets work.
“Farmers are not poor because they don’t get the subsidy, farmers are poor because their agricultural markets are not working. There is no way in which officials can sit in the food department and solve the problems of the volatility of the prices in vegetables. It can never be done. It can only be done if we ensure agriculture markets work, farmers have access to credit, they have insurance instruments that they can hedge against the weather conditions. If the people who are making the decisions are not convinced about making markets work, you will fail. Ranil Wickremesinghe is convinced that it is through the market mechanism that we can take this country forward. The game plan must be theoretically robust, sound and must be able to defend it at university anywhere. We are very clear that markets have to work. We will ensure we will do whatever necessary, whether it is the agricultural market, financial market, information market, that they work.
“The second thing is we need to have effective regulation. Without regulation and thirdly deliver economic and social justice. So, that is really our game plan. Everybody is part of this growth, but not everybody benefits from that benefit. What we are trying to do is to make everybody a part of this growth and allow them to benefit. In the recent past our economic policies have not being aligned with the kind of economy that we wanted to create. In that the inequities have grown. With more money circulating you all will see a significant pick up in your FMCG. If money is circulating and inflation is at benign levels, we could get the supply side to move along and if it clicks there will be supply side growth. On the demand side you increase the aggregate demand and on the supply side you aggregate the supply. Don’t worry, take decisions, we are going to come back in 100 days. Just keep going and meet your demand. We have not been shown the true picture in the past and the true picture is a little bit scarier scary than the one that was being shown. In the future, we are determined to create an equitable social market economy, where there is justice. Help us build a Sri Lanka for all,” he asserted.
Pix by Upul Abayasekara