A rationale for five-year economic planning

Friday, 7 April 2017 00:00 -     - {{hitsCtrl.values.hits}}


  • “Democratic planning requires full consumers’ sovereignty, as distinguished from the narrower concept of ‘consumers’ free choice” – Carl Landauer

By Laksiri Fernando 

Despite India’s replacement of the National Planning Commission with more ad hoc NITI Aayog (National Institute for Transforming India), India along with China will stand as good examples for the benefits of economic planning in a developing country. India was supposed to complete its 12th Five-Year Plan this year, and China initiated its 13th Five-Year Plan last year. India’s recent decision under neoliberalism might go in history as a mistake. 

It is true that economic plans themselves would not reap results, however superb they would be on paper. Action is needed with leadership at various levels and not only at the centre. In the case of Sri Lanka, the provincial councils and local government institutions should be closely involved. In this sense, an economic plan is a road map for where to go, possibly with outlining alternative routes and scenarios. 

Apart from correct action, there are so many other variables, national and international, that would affect development, stagnation or crisis in an economy. One of the major weaknesses of the 1972-1977 Five Year Plan of the United Front (UF) Government then was its failure to take into account these external factors. It is also true that international free trade managed properly for their own benefit has benefitted China and India immensely in their recent growth and development. Thus, ‘State/public sector planning’ alone should not be considered a panacea. What might be required, therefore, is overall planning with a whole area left for the market. China has even preferred the term ‘guideline,’ instead of ‘plan’ in recent times. 

Further reasons for economic planning 

It is generally assumed that arguments for economic planning come from socialist type of thinking, while the retention or reinstatement of unplanned or free market economies are inherent in capitalist thinking. This may or may not be the case, but Sri Lanka could adopt a more pragmatic approach in combining the two at least at the present juncture. After all Sri Lanka is a Democratic Socialist Republic! 

When the Western economists (other than the socialists) were advocating planned economies or several aspects of them in 1930s, their immediate objective was to avoid the recession or to come out of it. This is also the case today. After the ruptures in the European Union (i.e. Brexit) and apparent protectionism in the USA, the world might experience tough times, if not a full blown economic recession. 

However, in the case of Sri Lanka or in any other developing country, apart from the above international trends, the rationale for economic planning should be to achieve and sustain economic development, growth and prosperity. The development also should be people centred (consumers’ sovereignty), enhancing their living conditions and bridging the gaps between income distribution. Therefore, economic planning has a more fundamental imperative than conjunctural reasons. It is unfortunate in this context that Sri Lanka never ventured into consistent economic planning after independence, and few ad hoc attempts even became abandoned after 1977 altogether. 

There are of course other reasons as well. These are mostly located in the economic and social rights of the people. Take the example of education. Unless governments allocate sufficient funding for education, covering the primary to university education, the right to education could not be achieved. Then there are issues of ‘what kind of education’ that could also be resolved through a better planned economy, including teacher education and training. Educational planning does not limit to the targets. The nature of the education and contents should be determined through evidenced based planning and advanced pedagogy. Education is not only a right, but a long-term investment to generate growth and development. 

We are living in a period where there is much talk about human rights. But often, economic, social and cultural rights are neglected even in the UNHRC sessions in Geneva, giving priority only to civil and political rights. If a country is supposed to implement, for example, the International Covenant on Economic, Social and Cultural Rights (ICESCR), that cannot be done without a planned economy. Such an implementation undoubtedly would contradict the Washington Consensus on neo-liberalism. This is something even the present drafters of the new constitution have not taken into consideration so far under the chapter on fundamental rights. At least the imperative of economic planning should be highlighted under the chapter on the ‘Directive Principles of State Policy.

Some economic fundamentals 

Sri Lanka has gone through several upheavals of ‘nationalisations’ and ‘privatisations’ without proper direction for the economy through a system of five year plans. If there is a system of planning, through experience and evaluation of the past, any imbalance or defect could be rectified in the future. There should be a clear idea about what should be handled by the public sector and what ought to be left for the private sector. 

In my opinion, after safeguarding primary interests of people in the public sector, all others could be left for the private sector, while promoting a competitive cooperative sector. In addition, there is an increasing understanding that there are spheres where public private partnership (PPP) is most appropriate. Without clear guidelines and documentation, even when budgets are presented, there is fundamental lack of reliable data and analysis to gauge the future directions of the economy. 

Take the example of the last Budget for 2017. On the most important subject of ‘Investment’ for growth and development this is what it says:

“In the last decade, investments were maintained at 30.1% of GDP, but the bulk of it came from the Public Sector. This resulted in the country carrying a debt burden of almost 76% of the GDP, which is higher than that of our peers. At the same time, private sector investments have been stagnant.” 

When it says, “in the last decade, investments were maintained at 30.1% of GDP” it is not only vague, but also unreliable. In my opinion, the figure cannot be true, unless the government/s and the businesses might be doing something else in the name of ‘investments.’ On the other hand, the government does not have a clue about the breakdown of investments between the public sector and the private sector when it says, “the bulk of it came from the Public Sector.” What do we mean by the bulk? No one perhaps knows? 

Let me just ignore the reference to the ‘debt burden’ for a moment which is ‘ideological’ or ‘political’ in the statement. But the budget speech of the Minister of Finance does not explain why the “private sector investments have been stagnant.” Is it because of the lack of ‘ease of doing business’ as the World Bank prescribes or something else? No answers are given because perhaps no one knows for sure.  

The above is one reason why proper research and compilation of data are necessary from a planning perspective. If there is a National Planning Commission and a Planning Secretariat, these matters could be properly handled and necessary data and information could be compiled and available even for the public. In the case of India, the rate of investment was 24% out of the GDP and the contributions of the public sector and the private sector were respectively 6% and 18% as the 12th Five Year Plan (2012-2017) announced. There was a target to increase the investment rate to 35% with contingencies for higher economic growth. No such targets are available in Sri Lanka. A budget, obviously is not an economic plan. 

Investments to take-off 

In the absence of proper targets, estimates and strategies, the economic policies in Sri Lanka appear to be haphazard and even ideological. Instead, we should be more pragmatic. In a developed country like in Australia, for example, economic planning is not a major issue because the economy is developed. What might be necessary is fiscal management and incremental growth in sustaining the economy and delivering fairer income re-distribution. Policy and political debates are generally on those lines. 

But in a developing country like in Sri Lanka, we need to build up from a lower to medium base and the economy still needs to take-off. Sri Lanka’s economy is around $ 80 billion. Per capita income is still less than $ 4,000, with considerable regional and social disparities, which is around 30% of the world’s average. The level of per capita income has an impact on labour/output ratio, among other consequences. Simply said, you cannot expect a high labour productivity from those who are on the edge of subsistence level. This is one reason why the state sponsored welfare and subsidies are important, other than for their own social merit. 

If I may venture on some theoretical points, for the economy to really take-off under such circumstances, Rostow’s prescribed 10% of investment rate would not be sufficient. This is already proven in Sri Lanka and elsewhere. As he later clarified, this rate is applicable in a ‘strategic sector’ also depending on other factors, among which most important might be the capital/output ratio (The Stages of Economic Growth: A Non-Communist Manifesto, p. 192). This is what we normally talk as technology. Lower the technology, the capital/output ratio would be lower and even with a 30% of investment rate (although I dispute the figure), we cannot even achieve more than 6% of growth. That is not at all a take-off, however much we manipulate the overall figures. 

There is some attempt in the last budget to address this issue however distortedly. I am referring again to the most important section under ‘Investments.’ It says,

“The alternative is to facilitate more private sector investments and partnerships between the private and the public sector. We must promote investments in areas where the impact to the economy is high, due to value addition and employment creation. We will support domestic entrepreneurs especially in sectors such as agriculture, manufacturing, fisheries, ornamental fisheries, solar panel manufacturing, rolling stocks, livestock, poultry and tourism.” 

There is no apparent intention of the Government to enhance the public-sector investments, unless it is a private-public partnership. As the Minister has said: “Given the fiscal constraints that the large debt burden has imposed on us, I do not think that it is prudent to continue in the same vain and pile up more debt.” Let us say, that is understandable. But has the budget identified a ‘strategic sector’ where private investments could be encouraged and diverted? It doesn’t appear to be the case. The sectors identified are “agriculture, manufacturing, fisheries, ornamental fisheries, solar panel manufacturing, rolling stocks, livestock, poultry and tourism.” 

The identifications are quite vague (obviously without planning or much thought), with ‘agriculture, manufacturing and fisheries’ mentioning as general areas. The specific areas mentioned are ‘ornamental fisheries, solar panel manufacturing, rolling stocks, livestock, poultry and tourism.” There cannot be any doubt that all these areas have great potential for contributing to the economy and while some are new (rolling stocks), other are not so new (solar panel, ornamental fisheries). It is also not clear whether in the case of ‘rolling stocks,’ whether the government really think that those locomotives could be manufactured in Sri Lanka? It is good if it the case, but what we know from last year is that the Minister of International Trade was approached by two (SOE) Indian companies for the building of railway lines and supplying of locomotives (EconomyNext, 6 July 2016).  

Be as it may, the whole section on ‘Investments’ is haphazard without at least expected targets from the local private sector or through FDI. What it offers instead are concessions of capital allowances, tax concessions, visa for investors and expatriate labour and liberalisation of foreign exchange transactions. Some concessions are undoubtedly necessary, but the purpose should not be of creating a capitalist class at the expense of ‘sovereign consumers’ interests. 


Finally, let me turn to some of the misconceptions about economic planning in Sri Lanka and in general. First, the recognition of the market economy is not a reason to give up economic planning for a country. Economic planning can encompass even the private sector without unnecessary strictures or constraints for them. Their input in formulating national plans is also important. This is further important where the public-private partnerships are feasible and beneficial. 

Second, as Montek Singh Ahluwalia, the Deputy Chairman of the Indian National Planning Commission, explained in his Preface to the 12th Five Year Plan in 2013, “National planning is a process of setting national targets, and preparing programmes and policies that will help achieve those targets.” These targets are not only about growth and narrow development, they are about raising the living standards of the population as a whole. As Ahluwalia further said, “Along with programmes, the policy content of the Plan deserves much greater attention than it typically gets. In an economy in which the private sector has grown in scale, decisions taken by individuals and firms determine many critical economic outcomes, and the policies which influence these decisions are therefore important.” The above is equally valid for Sri Lanka. 

Third, if the private sector has demonstrated capability of investing and stimulating growth in certain areas, the public-sector initiatives and investments might not be necessary in those areas. However, if the private investments are stagnant (see the budget speech) whatever the reason, the Government should not unnecessarily try to stimulate ‘profit making’ like in the case of ‘bond issues.’ 

Fourth, in the last Budget, as well in other statements, there had been much talk about a ‘bloated’ public sector. As I have pointed out in my last article (A review of Razeen Sally’s Sri Lanka: Three Scenarios for the Future), 1.5 million employees are not excessive for a country like Sri Lanka for around 21 million people. Australia has 1.9 million in the public sector for a little over Sri Lanka’s population. The issue is not the size, but its output and orientation. That can be corrected through retraining, restructuring and with specific performance targets. The private sector has ample opportunities, if they have funds and initiative, to expand into other areas. They don’t need to encroach into the public sector! While allowing 1.9 million in the public sector in Australia, the private sector employs roughly about 10 million people. In the case of Sri Lanka, this is only about four million and that also includes a large number of self-employed people. 

Fifth, if there is a planned economy, and research and surveys towards that end, all these facts could be known more accurately without much speculation. If the Government is interested in assisting the private sector, in promoting economic development, that can be done through the banking sector without actually channelling public funds to the private sector. Public funds are people’s money and not of politicians’. The banking sector is thriving, including the public-sector banks, and they can lend necessary funds to the private sector, if the latter wants. For all these matters, what is important is to have a planned economy for Sri Lanka, including a vibrant private sector. The economy could have two engines of growth and not one: public engine and the private one.

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