When people realise that their property can be robbed or destroyed by mobs with total impunity, the cost is not only the immediate loss of output. It causes a long term output loss via non-investment or inadequate investment in physical property and human capital by affected individuals.
Property rights are the corner stone of any economy
Property rights of people are at the foundation of any economic system, whether it is free-market, statist, or socialist. People do what they do in an economy if they can enjoy the fruits of their labour – in the parlance of economists, physical and human property they have acquired and called property rights – without the fear of it being taken away by someone against their consent. If they consent, it should be done only by paying the appropriate price agreed between them. Thus, destroying physical property and causing injuries or death to life in mob violence amounts to robbing them of property they have owned, or violation of property rights.
It is the responsibility of the modern state – and of the king in olden times – to protect the property rights of people. If the State fails, the loser is not only those who have lost their property, but also the state itself. That comes from two consequential developments. First, for society to progress, people should continue to invest in physical and human property. When they realise that their property is not safe, they would think twice before they make a new investment. The casualty is the stumbling economy and consequently, the revenue-losing State. Realising this truth, the ancient Indian economics Guru, Kautilya, who lived in the 4th century BCE, advised the King in his treatise on economics – The Arthashastra – that the King should take proactive action to prevent the breakout of internal conflicts, which destroy both human and physical wealth. If they break out, he should use all his powers to eradicate them.
Mob violence, or a system ruled by mobs, called mobocracy, gives a free hand to a select few to rob or destroy properties owned by people. This causes mayhem in an economic system, and its short and long term repercussions are fatal to the health of an economy.
Plan to usher a knowledge era into the country
One good example is found in the infamous Black July 1983 in Sri Lanka, in which properties belonging to minority Tamils and the lives of many people were destroyed by freely-roaming mobs. In an article to Daily FT in 2014 (available at: http://www.ft.lk/article/333816/www.aquavista.lk), this has been narrated by veteran diplomat K Godage, who was the Secretary General of the Greater Colombo Economic Commission or GCEC, predecessor to today’s Board of Investment or BOI. At the very first meeting with the then-President, J R Jayewardene, the top brass at GCEC had been asked to go to the West and acquire new technology to usher a new production era in Sri Lanka.
Subsequently, GCEC Chairman Upali Wijewardene had asked Godage and others to get investments in Information Technology or IT from reputed US firms. The objective was to change the disparaging title that had been given to GCEC by its critics as a ‘tailoring zone’ and convert it to an ‘information age zone’. This was the wisdom and foresight of the veteran businessman Upali Wijewardene in those days, when IT was relatively unknown and agriculture and industry were considered the lifeline of an economy.
Accordingly, GCEC had persuaded two large IT and electronic product firms in USA, namely, Motorola and Harris Corporation, to establish two factories in Katunayake, to supply their products to Asian markets. The work relating to the establishment of these two factories had progressed well, and they were to be opened at end-1983. However, this was to be disturbed by the breakout of mob attacks on minority Tamils in July 1983.
The sad pull-out of Motorola and Harris Corporation from Sri Lanka
In 1982, Godage had left GCEC to take up a position in Sri Lanka’s Embassy in Washington DC. He had explained the subsequent developments in the article under reference as follows:
“In September of 1983, the Senior Vice President of Motorola, who knew me as I had visited their offices and met him, came to the Embassy along with the VP of Harris and another IT company, and told me that they were pulling out of Sri Lanka. I was surprised, as I knew that both Motorola and Harris had begun construction work on their factories.
“When I inquired as to the reason for this decision, I was told by the SVP of Motorola that their representative, who was supervising the construction work on their factories, had been killed in July during the pogrom against the Tamils and that, therefore, they had decided to leave, and where did they go? It was to KL, Malaysia, where there are no less than 12 chip-manufacturing companies, each employing hundreds. This is besides the related research companies that have established there. This is only a small part of what we have missed because of July 1983. In 1981 we were about to embark into the ‘knowledge industry’ and information production and dissemination, but we have been left behind. These new technologies have expanded with the proliferation of personal computers, and then surged dramatically with the widespread use of email and the internet.”
Motorola Malaysia is a giant today
Motorola Malaysia is now a major site in its operations in the Asia-Pacific region, adding to Malaysia’s research and development capability, as well as to its high-tech product share in manufacturing exports. According to Sri Lankan-born economist Prema-chandra Athulorala, Motorola’s largest research and development facility, responsible for developing and manufacturing its two-way communication devices, is located in Penang, Malaysia (available at: https://crawford.anu.edu.au/pdf/events/2012/20120724-athukorala-paper.pdf). Harris Corporation in Malaysia has been producing defence, military, and airline-related electronic products, along with its other production units located in different countries in the region.
From tailoring zone to underwear manufacturing economy
So, Sri Lanka had lost a valuable opportunity to bring the required information age to the country, despite the fact that, with the opening of the economy in 1977, it was the first country in South Asia to introduce computers on a wide scale to its economy. As a result, Sri Lanka continued to get foreign investors to invest in low-tech products, like textiles and garments. Investors loved to do so, because they could pull out of Sri Lanka at any time at minimum costs if the political situation in the country became unfavourable. In fact, that was done by many Korean companies during the subsequent two decades.
Over the years, Sri Lankan firms took over the apparel industry, specialising in manufacturing quality lingerie to the global markets. The critics who had earlier ridiculed GCEC as a ‘tailoring zone’ were quick to attach a new disparaging label to the country’s manufacturing sector. For them, Sri Lanka is an underwear supplier to the rest of the world. Though Sri Lanka has been a master in underwear production, the technology used for it is simple technology, which can be easily copied and imitated by its competitors. Thus, the loss of opportunity by Sri Lanka in 1983 has effectively placed a spanner in its growth path. Fettered by low technology, even today, the country’s biggest challenge has been to change its production system from simple technology to high-tech complex technology.
Who was responsible for this economic debacle? It was the Government of the day, which did not feel the necessity of preventing mobs from attacking the economic interests of the people. The economic fallout of this debacle is still felt by Sri Lankans. Taking cue from this, the political leadership of the country would have taken prompt action to prevent the recurrence of another Black July in the country today.
Robbing of property rights
The bomb attacks carried out by an extreme Islamist group, loyal to the Islamic State or IS, on 21 April 2019 in nine locations in Sri Lanka, destroyed both physical property and human lives. The attacks on three leading hotels in Colombo have practically paralysed the fast-growing tourism industry for the time being. Though its value added, or what is remaining within the country after making external payments, has been less than 35% of the gross earnings, even that meagre net earnings had been an important source of financing the country’s wide trade gap. If this trend continues for long, Sri Lanka would find its ability to protect the exchange rate dwindling. In that situation, the country has to resort to foreign borrowings, mainly from commercial markets, adding to its existing economic woes.
Apart from the loss of life numbering more than 250 and injuries sustained by more than that number, economy has suffered from a widely held ‘fear psychosis’ by the majority of people, who have chosen to withdraw from the normal day to day activities. That cost has been more than the direct cost inflicted on the economy by Islamist terrorists. Thus, it gave a powerful signal to the Government that it should take effective measures to prevent the situation from further deteriorating to a full-scale religious battle.
Caging the anger of the Christians
It is the Christians who largely became victims of the Easter bomb attack. Hence, their anger could have easily been directed toward Muslims, thereby generating a secondary round of a religious war in the country. However, the leadership of the Christian community had the foresight to plead with its followers to stay calm, while the security forces would nab the culprits and restore peace. As a result, there was no incident involving the Muslims and other religious practitioners in the subsequent two weeks.
But in the meantime, the rumour mill moved into full action, and there were many wild stories about a possible full-scale attack to be carried out by IS supporters on non-Muslims, specifically on the Buddhists, in the country. The Government could have taken effective action to neutralise this rumour mill and inculcate confidence among the majority Sinhalese. But this was not done. The result was the use of the Government’s inaction by some interested parties to trigger off a major attack on Muslims and their economic interests in certain parts of the country.
Death blow to the already ailing economy
This delivered a death blow to the already ailing Sri Lankan economy. In 2018, the country had recorded the lowest economic growth in 20 years at 3.2%. At the beginning of 2019, there was hope that this declining trend could be arrested, and the economy could be placed back on its long-term potential growth path. Accordingly, the Central Bank had predicted that the economy will slowly but steadily recover within the next 5-year period, accelerating the growth rate to 5% by 2023. Now, with the new man-made catastrophe looming over Sri Lanka, this growth forecast appears to be out of date.
Failure to observe the rule of law
The two events that kept the country under shock during the last four weeks demonstrate the Government’s failure to protect property rights. When people realise that their property can be robbed or destroyed by mobs with total impunity, the cost is not only the immediate loss of output. It causes a long-term output loss via non-investment or inadequate investment in physical property and human capital by affected individuals. Hence, no responsible Government could ignore the need for protecting property rights at all costs. To do so, the essential requirement has been the implementation of law and order and observance of the rule of law. But all the successive Governments in the past had failed to adopt these two requirements to a satisfactory level. This is specifically observable in the case of the present Government.
Short and long-term consequences of mob violence
When people resort to mob violence on a large scale, it overstretches the controlling capacity of security forces. This has been seen even in a country like the USA, when racial clashes have erupted against unjust or unlawful acts on the part of law enforcement agencies. People who temporarily establish mobocracies step into streets, and destroy every type of physical assets that their eyes set on. Security forces manage to bring the situation under control after some time, but by that time, the damage has already been done.
The immediate cost to the citizens on all those occasions has been the need for setting aside the required funds for compensating the victims, by sacrificing other worthwhile expenditure programs. The long-term cost has been the non-investment or inadequate investment in physical and human properties, thereby stunting the long-term economic growth. The Government will also lose, as Kautilya had advised the King, due to the shrinking of the tax base.
Prevention is the best cure
Hence, it is of utmost importance to prevent the occurrence of such mob violence at all costs. If it has already occurred, the Government should apply the rule of law strictly and forcefully to every culprit concerned. The record maintained by Sri Lanka’s Government in the past as well as in the present on this count leaves much to be desired.
Lesson from the British Transport Police
Last week, as social media had widely reported, an Asian woman had been racially abused in filthy language by a white supremacist on a train to Newcastle. When this was brought to the notice of the British Transport Police, according to an official Twitter message issued by that agency, the abuser involved had promptly been arrested ‘on suspicion of racially aggravated public order’. The Police had also asked the witnesses to come forward to give evidence in the case. The Sri Lankan Government has to learn a lot from this, because there have been recent reports about Buddhist monks walking into Muslim-owned shops and chasing the customers away, or members of security forces remaining inactive when mobs were setting fire to business premises. Surely, mob violence is an enemy of democracy. But the failure of a democratic government to protect property rights by observing the rule of law to the letter is a far worse enemy than that.
Thus, allowing mobocracy to rule the country will entail the violation of property rights. Hence, any government which is desirous of establishing a democratic rule, should not ignore the necessity for taming this enemy of democracy.
(W A Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected] )