Saving the economy of Sri Lanka after the COVID-19 pandemic

The low level of productivity in SL could be due to several reasons such as the poor quality of the system of education, of physical infrastructure and the complexity of procedures and documentation. The system of education in SL according to the Global Partnership for Education is one of the worst 10 systems in the world! – Pic by Shehan Gunasekara

This article is about the manner in which the economy of Sri Lanka (SL) should be saved from the devastating effect of the COVID-19 pandemic. But it goes beyond the short term to the long term as the economy was already very sick when the pandemic hit the country due to problems which have not been solved for several decades.

Poverty

Apart from the visible effects of a lockdown such as supply chain disruptions, shortages of goods and services, the collapse of certain sectors like exports, travel and small and medium enterprises as well as unemployment, indications are that the poverty and inequality of incomes of people may have reached new high levels. 

Official records indicate the poverty in the country was 4.1% of the total population as of 2016. This is based on a so called ‘poverty line’ of Rs. 4,166 per person per month to be spent on food alone! In the meantime it is reported that the government had paid Rs. 5,000 each by way of COVID assistance to some 5.2 million Samurdi recipients amounting to about 24% of the population. Although this number may include some people who do not deserve such payments and even some who deserve them, it appears to be a more accurate figure of poverty in the country than the grossly inaccurate figure of 4.1%. Now the question that arises is whether even this number has been pushed up due to the devastation inflicted by the pandemic. This needs to be investigated immediately before making plans for development of the economy after the pandemic.

These effects of the pandemic need to be dealt with two types of plans i.e. short term and long term. The former could seek to solve the immediate problems such as the health issues, the supply break downs and the extension of relief to the worst affected. The enormous increase in poverty needs a long term plan (LTP) in anticipation of the recovery of the world from the pandemic. Avoiding a LTP is like repairing a building without a firm foundation. Most probably the LTP may take the form indicated in the given diagram. This outline is based on my book ‘Export Competitiveness and Poverty Alleviation’ published by the Godage Book Shop in 2017. A few of the more important items mentioned there will be picked up for discussion here.

Main objective 

Certainly alleviation of the new high level of poverty (and the inequality of incomes) mentioned above needs to be the main objective of the new economic development plan, indicated by the third step of the diagram. 

Main strategy

The main strategy, indicated in the diagram at the bottom left, needs to be implemented for this purpose should certainly be the attraction of an export oriented massive inflow of investment into the country to create jobs for the increased number of persons without jobs and to expand exports mainly to deal with the very heavy foreign debt of about $ 60 billion as of 2019.

It is estimated that if the economy were to grow at 8% per annum the country has to invest about 35-40 % of the Gross Domestic Product (GDP) every year. But SL does not save enough for the purpose; for example the average domestic savings for the last five years up to 2018 was about 22% of GDP. This is the justification for SL to attract Foreign Direct Investments (FDI). 

The other reasons for this are SL does not have the modern technologies required and an adequate knowledge of global markets for export of goods and services produced here. The FDI could provide these. But the fact is SL has failed miserably to attract FDI. For instance by 2018 the country has been able to attract a stock of only about $ 13 billion, apparently in gross terms, while Singapore has been able to attract a stock of about $ 1.5 trillion! The very first thing to do when preparing a future development plan is to find out why this has happened and studiously rectify the problems.

Absence of stability and predictability 

FDI normally go in search of large markets like China and India for their products. Otherwise they look for countries with social, political and economic (fiscal) stability, (see the fourth step of the diagram on the top) for a long period of time of about 30 years with predictability/consistency with the right kind of policies and not the five-year period normally considered in SL where we move to the right one time and move to the left another time. (The right kind of policies can be described as Social Market Liberalism, (a mix of socialism and liberal policies including open markets with the private sector as the ‘engine’ of growth under the supervision of the state, which in turn is responsible for infrastructure and social welfare), now adopted by about 100 countries such as Russia, India, China and the very successful East Asian ‘tigres’, having given up neoliberalism, (Ref. the articles on Liberalism and Socialism in the Encyclopedia Britannica). SL has not enjoyed such stability and predictability since 1956 and that is why it has not been able to attract the large and well known foreign investors like those listed in the Fortune magazine referred to as ‘the Fortune 500’. 

It should also be mentioned that the absence of socio political stability has compelled a stream of people to leave the country for good (according to reports some three million or so skilled and professional persons have already left creating some 500,000 vacancies in the various sectors vide the Labour Demand Survey of 2017 of the Department of Census and Statistics). 

Main reason

The main reason for the absence of social and political stability or a better enabling environment for development and of course inadequate investments in the country could be the inability of the leaders of the past to solve the so called ethnic problem which has given rise to terrorism and frequent clashes among the different racial and religious groups in the country since 1983, the last of which was on Easter Sunday last year. This surely needs a consensus among all political and religious groups to solve the problem once and for all perhaps by implementing the excellent recommendations of the Lessons Learnt and Reconciliation Committee of 2011 or by amending the Constitution (see below) suitably to satisfy the minorities. 

No other solution could succeed to solve the current problems of low growth , indebtedness and more poverty, as feelings of hatred that have erupted among the different racial and religious groups in the country since 1956 could give rise to more clashes or even refusal of moral support for any development efforts or strategies mentioned in the diagram. 

Improvement of governance

Another solution to the absence of a positive enabling environment or political instability (see the fourth step of the diagram) is the improvement of governance by making the following changes to the constitution: 

i. Resolution of the controversial twin executive centres at the top of government proposed by the 19th Amendment and provide for a Prime Minister and 30 Cabinet of Ministers with rationally defined areas of operation.

ii. Separation of powers and checks and balances among the legislature, the executive and the judiciary with strictly independent commissions preferably consisting of non-political professionals in relevant areas; removal of article 55 of the present constitution to promote the selection/promotion of public officials purely on merit and not on the basis of political connections, to increase the efficiency/productivity of public institutions.

iii. A complete Bill of Rights conforming to relevant international covenants, to build a harmonious and integrated Sri Lankan nation state such as a) to ensure that all citizens irrespective of race, religion or caste will have equal rights, b) the inclusion of English as another national/official language that will bind the different communities and enable communication with the rest of the world, c) setting up a Council for Ethnic and Religious Affairs to promote harmony among the various racial and religious communities and d) announcing that activities/speeches promoting ethnic and religious disharmony are an offence punishable with imprisonment for three years or a fine or both. 

iv. Devolution of development power to the regions (districts, divisional councils, municipalities, town councils and village councils after the abolition of the provincial councils, which have proved to be ‘white elephants’) with clearly set out powers (without a concurrent list) and with no right for amalgamation of regions or districts.

v. Amendment of the system of elections by making the smaller constituency as the unit of election of a Member of Parliament and not the district to reduce the level of election campaign expenditure that induces bribery and corruption (Corruption Perception Index, SL rank 93 out of 179 countries, Transparency International, 2012-2019).

vi. The concessions given to MPs including the grant of liquor permits, car permits, the right to carry out contracts or give out contracts to be removed; provide for procurement of materials and equipment strictly on a supervised tender basis and a requirement that annual declaration of wealth by all parliamentary local government representatives is compulsory.

vii. Regulation of political parties including clauses on financial control and an insistence that their members would not resort to corruption, change of party loyalties as well as a pledge that they would never incite racial and religious violence. There should also be an article that all MPs should have at least A/Level qualifications. 

Low productivity 

One of the major effects of the ‘social distancing’ involved in the control of the pandemic is a substantial lowering of productivity/efficiency in the country; see the third strategy at the bottom of the diagram. ‘Productivity, in economics, measures output per unit of input, (factors of production) such as labour, capital or any other resource, Investopedia. (Picking one factor, e.g. the productivity per worker in SL, in 2016 it had been about $ 31 compared to about $ 132 in Singapore, according to the Asian Productivity Organization). 

The low level of productivity in SL could be due to several reasons such as the poor quality of the system of education, of physical infrastructure and the complexity of procedures and documentation. The system of education in SL according to the Global Partnership for Education is one of the worst 10 systems in the world! The rank of the quality of infrastructure according to the World Bank was 79 vs. 2 for Singapore out of 176 countries in 2017. The procedures and documentation involving business operations are also complex leading to long delays as indicated by the Ease of Doing Business Index of the World Bank according to which the rank for SL was 99 out of 199 countries. 

Since the level of total factor productivity may go down substantially in SL due to the COVID-19 pandemic, urgent action needs to be taken to improve it considerably by resolving the above mentioned problems. 

Global competitiveness

According to the Global Competitiveness Report 2019, SL’s ranking regarding trade openness was 127 out of 141 economies due to high import duties. SL has been moving in the opposite direction of trade openness for improving global competitiveness as proven by the following comment. ‘The present import regime is one of the most complex and protectionist in the world. Sri Lanka: A Systematic Diagnostic’, World Bank, 2016. 

There are three main requirements to improve global competitiveness; a) reduction of import duties and para tariffs gradually, b) to promote intense competition among private firms to pressurise them to undertake further investment to reduce unit costs of production or improve productivity and c) improve value addition to satisfy the needs of customers in such a way as to be able to beat the competitors in international trade especially through innovation; this is referred to as ‘differentiation’.

Improving agricultural productivity 

There is now intense discussion about achieving self-sufficiency in food production. What is actually needed is to improve the earnings of rural communities as about 90% of people in rural areas (about 80% of the population) in SL are reported to be poor; it should be noted that gaining self-sufficiency in rice did not make the farmers prosperous. The problem actually is that the farming units are too small to realise productivity and gain higher earnings, (incidentally productivity or value addition per worker in forestry, agriculture and fishing was about $ 2,800 for SL vs. about $ 95,000 for Israel in 2018). 

According to the Agricultural census of 2002 about 45% of land holdings of a total of 3.3 million are about ¼ acre in size. This number may have now increased due to fragmentation. Most of these are not owned by them as they are leased by the state under the old Land Development Ordinance of 1935 giving rise to delaying procedures and even bribery. According to the Global Competitiveness Report 2019 the quality of Land Administration in SL is in fact one of the worst in the world, being ranked 135 out of 141 countries. 

Where the size of the holdings is concerned the solution is to increase it while giving ownership of the units by undertaking state led land reform, as successfully undertaken by Japan, South Korea, China and Taiwan, to convert farmers from labourers to entrepreneurs; the small subsistence farmers displaced by the process were found employment in private sector manufacturing industries promoted by the government. 

It is only after (state led) land reform is undertaken in SL with care that the incomes of farmers could be raised substantially, while increasing food production and not certainly by giving hand-outs as in the past. This is a strategy that will also lay a firm foundation for further growth and even prosperity in SL as in the countries mentioned above. 

Reducing the pollution of the environment

 Although this is mentioned last this strategy is extremely important to save lives. This is the lesson taught by the spread of the COVID-19 pandemic. A Harvard University study has found that most of the deaths in the world due to the pandemic, being a respiratory illness, have occurred in thickly populated urban areas where pollution of the natural environment especially of the atmosphere is highest. Where SL is concerned the World Bank (Climate Change Portal) has stated in a report that it is one of the countries in in South Asia that would be particularly affected by way of floods, droughts disease, etc. due to the expected global climate change. 

SL has therefore to pay more attention to saving its natural environment by the prevention of the pollution of its land, air and water resources especially by gradually abandoning the use of fossil fuels such as petroleum, gas and coal while resorting to greener sources of power like solar and wind energy, adopting suitable legislation (due to the inadequacy of existing laws), improving public awareness, preventing the excessive use of chemical fertiliser and weedicides/pesticides as well as by increasing the forested area which can absorb the carbon dioxide poisoning the atmosphere. 

SL’s farming population is a high of about 26% of the total labour force. This shows that SL has allowed the farming population to encroach into the forested areas and steep slopes also causing a human/wild animal conflict as well; the extent of primary forested area has in fact shrunk to 2.6% of the land area though the total forested area is reported to be 29% (?) of the land area according the Food and Agricultural Organisation of the UN (2010). This can be attributed to the absence of land reform to improve agricultural productivity and the inadequacy of investing in manufacturing industries in SL to absorb the excess farming population. 

Conclusion 

The COVID-19 has indeed inflicted severe damage to the economy of SL disrupting supply chains, creating unemployment while pushing up poverty levels substantially. A short term plan has to be prepared to give immediate relief to the people severely affected. But the SL economy was already very sick long before the pandemic struck as successive governments have made many serious mistakes. These have to be corrected by a long term plan covering 30 years or so as indicated by the diagram above with the consensus of all political parties since changing policies to the left and to the right every five years as before will definitely not help.

The main objective of this plan should be to reduce the very high level of poverty and inequality of incomes caused by the pandemic as well as to expand export earnings especially to pay up the large foreign debt of about $ 60 billion. The main strategy of the plan should be the attraction of a large inflow of export oriented Foreign Direct Investments of the large kind with a good reputation as local savings/investments have been inadequate. But this needs an enabling environment consisting of social, economic and political stability which has eluded SL from 1956. 

This essential stability could be realised by a consensus among all political parties for solving the long standing ethnic problem to unite the various racial and religious groups in the country behind the objective of the plan. The Constitution of SL has to be amended for this purpose to confirm this unity as well as for providing good governance by correcting the many weaknesses in it. The rest of the strategies indicated in the diagram are desired as usual to improve fiscal stability, productivity especially of rural agriculture, the global competitiveness of the country and of course to save our precious natural environment. 

Political consensus for all this is the need of the hour.

(The writer is a Development Economist.)