Economics to prevail over politics: The awakening long overdue

If economics were to prevail over politicians/politics, should not this highway solarisation prevail over the political leaderships of the State machineries dealing with generation, transmission and distribution of electrical energy as well as over those dealing with liquid fuels powering transportation in the country?

Introduction

It was interesting to read W.A. Wijewardena’s article titled ‘Crisis-ridden Sri Lanka economy: Time for economics to prevail over politics’. When a former Deputy Governor of CBSL says that Sri Lanka’s economy is in a crisis and it has been manifested from around 2013 – we are in 2018 today – and that we had been sitting on this without taking action, should we not get alarmed? Yes, we should.

Of course, there is nothing new in this. We had been writing to Dr. P.B. Jayasundera regarding this crisis in 2010-2012 with graphs indicating how increasing fossil fuel prices has been ruining our economy. We not only indicated the crisis with graphical presentation, but we also explained the only possible solution with outlines of how the then Government could have projected our economy on a path to get over the middle-income country trap.

Our realisation of this crisis was after we studied the CBSL Annual Report of 2009 which had Table No. 8 titled ‘Private Consumption Expenditure’. 

What CBSL Annual Reports say

When we started our research on climate change, we started looking at data related to transportation and found the same in CBSL Annual Report for 2009 Table 8. I found that the second largest item in that table of Private Consumption Expenditure, for 2009, after food and beverages at Rs. 1,186 billion to be transportation at Rs. 654 billion and we thought that it was too high for a small 65,000 km2 country like ours. 

While the CBSL report of 2005 had figures of Rs. 569 billion and Rs. 208 billion in respect of these two items for the year 2005, the figures given in 2009 report for the year 2005 were Rs. 662 billion and Rs. 338 billion respectively. I don’t intend to discuss these adjustments as these have led to many a controversy during the last few days. But what I want to emphasise is that according to these figures it was in 2005 that ratio of our expenditure on transportation to that on food and beverages crossed this 50% mark and there was no turning back since then. Veteran economists at the Central Bank should have rung up an alarm bell when this ratio crossed this 50% mark. It may be that it was not their job.

Economists would always use the following terms in explaining the gravity of our situation; even WAW has used these macroeconomic indicators. Exchange rate, debt to GDP ratio, trade deficit, balance of payments, budget deficit, etc. I believe all these are measures of the system’s condition and even the patient – average citizen or the politician – knows them. What they don’t know is the root cause for these and that is what the economists should bring to the operating theatre.

Of course, the Governor of CBSL has just mentioned that our imports of gold and vehicles is an unbearable strain on the economy. This is where that Table 8 in the CBSL Annual Report comes in handy. Here in a small country of 65,000 km2 area we are devoting nearly 80% of what we spend on food and beverages or 20% of our total expenditure to fund transportation. What this implies is that all our export revenue would get sent abroad without leading to productive usage. 

When we studied it later, further going back to CBSL Reports, we found that ratio of private expenditure on transport to that on food and beverage has increased from a mere 23% in 1999 to 51% in 2005 and 70% in 2013 (year in which the current crisis has become apparent according to WAW), 83% in 2015 and ultimately to be 74% in 2017, this reduction being probably due to oil price dropping by 50%.

As such transportation could be considered as one aspect that need to be addressed, if we want to bring economic sense to the table and to the mindsets of politicians. Neither the President nor the Prime Minister nor the party in power seems to be concerned about these hard facts – probably no economist brought it to their notice – as they seem to be offering exotic vehicles to ministers and parliamentarians and the value of the vehicle appears to be an indication of his / her value to the party in power. 

The first step in making economics to prevail over politics is to make the politicians understand the economics involved in running a country. Those politicians who understand the economics probably might not like to make economics understandable to all politicians. I always like to assume that all our politicians are good and they want our country to prosper well; but the sad thing is they do not know how to achieve it. We need to explain what those many tables in the CBSL Annual Report mean and how that data could be used to work out strategies to achieve our common objective of making Sri Lanka great. That is why I always say that we should have the CBSL Report discussed in the Parliament for a couple of days.

One should not be surprised at this significant contribution of transportation to the Private Consumption Expenditure. If one looks at our imports in the year 2014, (as per CBSL Report 2015) one would see that the import value of all the consumer goods – i.e. rice, sugar, lentil, fish, milk, spices, motor vehicles, etc. – was only Rs. 503 billion, investment goods including machinery and equipment was only Rs. 542 billion and our fuel import bill was Rs. 600 billion out of which coal and LPG imports was only Rs. 46 billion. Fortunately for us, oil price came down by 50% in 2014-15 and we used a part of the saving to import 25% more vehicles in 2015.

This is exactly what IMF wants us to do – when the oil prices come down, don’t spend that money saved to develop a capability to do without oil; but reduce the price of oil, make vehicles more affordable, import more vehicles so that the oil exporters could have same cash inflow and when the oil prices finally go up their revenue would be doubly higher to compensate for the losses when the oil prices were low.

Moving out of this debt trap

It is these thought processes which prompted us to look at an option to reduce this damage, oil driven transportation was doing to our economy and we singled it out as the most significant contributory factor in need of immediate action if we are to move out of the precipice where we are in. When our incessant study of these issues showed us that motor vehicles driven by internal combustion engines waste 80% of the energy brought in by the fuel oil, we found that this is the area which demands immediate attention.

We saw that statement in IPCC TAR 4 to the effect that photovoltaic solar could yield 450,000TWhrs of energy every year; but it has four disadvantages in that (a) it needs a large land area, (b) it is a distributed source of energy, (c) it needs to be stored and (d) it involves a high investment. Then this was the perfect match for vehicle electrification which made the above mentioned four drawbacks immaterial.

We perfected the match by identifying the highways to be the place where photovoltaic solar panels should be laid, in order to capture solar energy and feed to either the battery electric vehicles or to the grid. This set up eliminates the four disadvantages captured by the IPCC. Land area – large in extent – is freely available and cannot be used for any other purpose. Distributed source matches the highway. Energy will be used for storage in a battery and electricity will be used in an application where currently 80% of incoming energy is wasted and as such could fetch a higher price.

That is how highway solarisation was conceived. 

When Wijewardena wrote about economics prevailing over politics, what came to my mind was the economics of highway solarisation. Here, of course, we recollect the definition for Economics given by J.B. Say: i.e. the science of production, distribution and consumption of Wealth.

Wealth is ‘energy’, to grab which, the top-most companies in the world drill thousands of feet within mother earth vertically, horizontally, and in all sorts of directions, may be even across borders, boundaries underneath. Then, here, we have this raw material descending upon us, at the rate of 325 TW hours a day for the total land area of Sri Lanka, free of charge falling on the black surface of a highway, merely to be absorbed and reradiated out as long-wave radiation leading to global warming. So, in effect this raw material is with a negative cost. Production is merely to lay some PV solar panels above and along the highway with no moving parts and least operational costs. It does its job without supervision, etc. No inventories, no store keeping, no material movements.

When it comes to distribution, it is automatic and it gets distributed along the highway enabling the consumers – of Battery Electric Vehicles – to go to the nearest charging station and purchase it. The consumption is again along the same routes along which it gets produced and distributed. It caters to the need of storage in the BEV beautifully.

This is the most economical production process – as per J.B. Say’s definition – in the world to my knowledge; a raw material with a negative cost, converted to wealth, distributed as it is created, directed to the places where consumers will be eagerly waiting for delivery to commence consumption.

If economics were to prevail over politicians/politics, should not this highway solarisation prevail over the political leaderships of the State machineries dealing with generation, transmission and distribution of electrical energy as well as over those dealing with liquid fuels powering transportation in the country?

Possible way forward

WAW also talks about what President Park Chung-hee’s Economic Planning Board suggested as projects to be undertaken by Korea’s investor community. When we wrote that article on ‘Making our balance of trade positive’ in August, 2014, we also mentioned about the type of industries we need to indulge in, aligning them to the most dynamic industries in the world. We said that automobiles and energy sectors presently contributing to more than 10 companies out of top 25 in the Fortune 500 rankings would undergo revolutionary change during the following 10 years and it is the proper time for us to grab a decent portion of this new set up. Even if we carve out a portion in proportion to our population, we should be able to get about $ 11 billion per year portion and any first mover advantage may take it up to about $17 billion per year portion.

The industries we promoted were linked to highway solarisation – we thought that it would elevate our standing in the international investor community – and were like assembly of battery electric vehicles, research into and the manufacture of batteries for BEVs, etc. In fact, we suggested we establish an incubator for green industries at Hambantota and we were guided by the document titled ‘Green Economy’ by UNEPA to which Bloomberg, PWC, Deloitte, etc. had contributed. It said that this green economy is going to be a $1 trillion per annum business out of which about $ 500-600 billion will be for energy related projects and another $ 300 billion will be for automobiles.

That was in August 2014 and what did Prof. Joseph Stiglitz, the Nobel Laureate tell us when he came here to advise us in July, 2015. He said the same thing; invest in Green Industries and move towards a Green Economy. And what did Prof. Ricardo Hausmann from Harvard Kennedy School tell the BOI officials when he was here a few weeks ago. He also wanted us to move into automobiles and it is noteworthy that Prof. Henry Lee who pronounced in July 2011 that BEV will be the ultimate winner in this current competition between different types of green cars is also from Harvard Kennedy School.

You can get any number of Professors and consultants from overseas to make recommendations and if they are worthy of the mettle they will not have another way forward to present than what we have presented. Go in for a Green Economy and there is no other set of industries which will move Sri Lanka beyond the middle income country trap. Economics prevailing over politics will be of any use only if we move in the direction of a Green Economy and the front running pall bearer will be Highway Solarisation.

What we have lost already

I am neither a mainstream economist nor an economist by vocation. I am only an economist by default. When I write these things, within me is a deep uncertainty whether I have understood this Table 8 in CBSL Annual Report correctly. That is, when this table shows a significant increase in transportation in comparison to the food and beverages expenditure what does it really mean? Does this high percentage in the region of 50-80% relative to food and beverages or 20 % of total expenditure indicate an alarming level? When this percentage crossed the 50% mark in 2005, shouldn’t the CBSL personnel rung the bell and brought it to the notice of the politicians or shouldn’t the economists have warned the government in power? Or who else should have brought it up?

When I searched the internet, I came across a few situations where these comparisons has been done; one for Philippines and another for OECD countries. Then there was a study done by a group of researchers from Universities of Texas at Austen, Southern Florida and Arizona State. South African data indicates that in 2014 transportation expenditure been only 50% the household expenditure on food and beverages and in 2012 in Philippines it had been only 25% of food and beverages expenditure. In Australia – a much larger country – the transportation has contributed only 10 % to the total private expenditure in 2016. Does this type of data indicate that our expenditure on transportation has increased significantly during the first half of this decade? Just imagine what would have happened to us in 2016 if the oil prices did not come down.

We should not reduce the price of petrol when the world price of petrol comes down, as per the advice of the IMF because then our addiction to petrol and related transport systems will not be disturbed. Instead of that, we need to invest any money we save due to lowered oil prices in systems which provide energy when the oil prices go up and we become independent of the oil barons. Furthermore, please remember that this fossil fuel usage is the most significant contributory factor to climate change and our moving away from it and showing others how to do it will be an enormous service to mankind and to our future generations.

Increasing public debt

It was about a year ago that we wrote to the papers about the $1.7 billion loan obtained from a Chinese Bank at 2% interest to be settled in twenty years, to fund the 96 km extension to the Southern Expressway. We said that the toll fee from the highway will be enough to settle only the interest and the loan will be handed over to the future generations. Now we read in the Daily FT of 05th instant that we have obtained a syndicated Yen 100 billion loan at JPY TBOR + 0.95% interest rate to fund a 32km stretch of the Central Highway. The projection of our inability to settle these loans taken to build “loan-funded infrastructure” not generating a tradable product will be a foregone conclusion.

“Yes, we will settle these debts and don’t worry,” a governmental spokesperson will say and I hope everybody would believe it.

Finally, if economics were to prevail over politics, we should demand that the contestants at the next presidential election shall pronounce (a) how they are going to deal with these two issues and (b) make one promise. The two issues are (1) the plans they are going to put in place to pay back these huge debts and (2) what are their policies on (i)energy for electricity and (ii)energy for transportation.

They should promise that they will not provide new vehicles for their parliamentarians nor for their security staff.

If they don’t do these two things, I guarantee that they will put the future generations of this country into much greater peril.

Conclusion 

What is better: listening to a Sri Lankan and follow the path to economic freedom and away from climate change or ignoring it – it is a Sri Lankan solution and cannot be as savvy as one from a foreigner – and going down the precipice of economic destruction associated with climate change havoc? Would the mainstream economists make a contribution and show the folly of these arguments or keep mum to imply it does not deserve their comments?

(The writer is Managing Director, Somaratna Consultants Ltd.)