Abandoning populist politics to deliver a development philosophy in 2017

Tough decisions have now got to be made irrespective of the political impact it may have. The present Unity Government is the ideal platform to begin the path towards a development philosophy where each individual pays for their own social requirements

Political leaders of the ‘Yahapalanaya’ or Good Governance Government are grappling with a whole range of problems at the moment, while simultaneously facing a challenge to their authority from populist views and nationalistic ideologies. Despite almost two years in office, the Government has failed to bring consistency to its shifting economic dogmas. 

If it is possible to look at the economic history of Sri Lanka, politicians have tacked with the prevailing winds to ensure they stay in office. Economic policies have been adopted when they are useful to the process of the parties to gain economic and political power. However, there has been a few deviations from populism in recent times with the forced shift towards higher taxation policies shown with the increase in Value Added Tax (VAT) to meet IMF requirements and the debt to equity swap with the Chinese to ease the debt burden on the Hambantota Port. The essence of these two scenarios is the crippling result of the unsavoury populist policies and negative capital investments implemented for decades by both the UNP and SLFP led governments in order to gain political mileage.

Impediments hindering the deviation from populist politics

Welfare policies are at the centre stage of any populist policy debate. Determining a formidable path is not as straight forward as highlighting the flaws in a system. The Sri Lankan Government has had a strong welfare system backed populist policies for a long time and has resulted in many households being dependent on the Government for their retirement income, employment, housing, health care and education. Conceding to these aspirations of the people to grasp political mileage has now contributed largely towards a growing budgetary expenditure led surging debt burden, stagnating economy, a falling currency with depleting reserves and an oversized state sector. 

Despite the debt burden, the Government must continue with its welfare measure to ensure that they prevent high rate of inequality. In addition, the enhancement of welfare measures, insupportable salary hikes to state employs and subsidies will have to continue, as it is strongly at the forefront of the power struggle of successive Governments. 

Building a development philosophy

A development philosophy is a framework built on the policy foundations of free trade, capital formation, stringent education system, predictable low taxation policy and a credible judicial system. Sri Lankan policies should hold a similar notion to that of the late leader of Singapore Lee Kwan Yew, who built his countries policy framework in a manner that one generation would not bankrupt the future generations by selfishly living beyond their means. Sri Lanka is now a country that utilises most of its revenue to service its debt and interest payments. The resulting budget deficit comprising mostly of state employees’ salaries, pensions and expenditure of education, health and infrastructure has to be financed by borrowings.

It is now evident that the country cannot forge ahead towards a formidable growth under the current structure in which free goodies are distributed. Despite the heavy criticism and lack of popularity, the Government must forge ahead with the following reforms and courageously seek its implementation:

Welfare state to a savings-driven state

A forced savings mechanism must be developed where the employees contribute a portion of their income (similar to EPF and ETF) to the fund. The accumulated capital in the fund can thereafter be used to finance any healthcare requirements or make payments for housing. The model has been successfully adopted in Singapore where at times the forced saving rate has been as high as 50% of income. All employees under 50 years of age must set aside 20% of their wages, while employers contribute 16% to an account where they grow through time until specific needs arise. This has resulted in about 90% of Singapore households being home owners, which is the highest rate of home ownership in the world. This will allow a significant part of Government expenditure to be allocated towards education where the economy could thrive through the discovery of innovation and technology. 

Downsizing the public sector

The public sector accounts for nearly 1.3 m of the work force in nearly 200 state-owned enterprises. The public sector salaries and pensions accounted for Rs. 717 b (49% of Government revenue) in 2015. The huge weight of the wage bill has meant that priority expenditures on health, education and infrastructure have to be limited to meet the requirement. The private sector investment has also been crowded out with higher borrowings pushing up interest rates to finance Government expenditure.  

Many politicians have used employment within the state sector to nominate their political henchman and supporters. However, downsizing the state sector on a voluntary retirement scheme was implemented by the UNF government in 2003, but it only resulted in the government being voted out of power. Irrespective of the past results it is now time for the government to appoint a committee that identifies the exact labour requirement of the state sector. Once the requirement is known, a transparent system must be implemented to reduce the labour force even by as much as 50%. 

Fostering Public-Private Partnerships (PPPs)

PPP will fall in line with many opposing views of the nationalists. However, given expenditure constraints and debt burden that is presently felt by the government, any mode of future infrastructure development must be ventured through PPPs. With the creation of a transparent process to transfer the operational rights, the Government can deploy two modes of PPP’s which include the Build Own and Operate (BOO) and Build Own and transfer (BOT) models to construct future infrastructure. Further, the joint venturing of lost making state enterprises as PPPs is a strong positive measure. This can be applicable to restructure certain institutions such as the state airline and make it profitable again. 

A degree of caution must hold on PPPs of strategic infrastructure projects such as the Hambantota Port. Considering the significance of the Chinese and impact it could have on state affairs, granting them a sizeable land extent in the south along with a strategic asset, could mean that they will have the ability to impart an undue influence on the integrity of the country and the economy at any given time. It is therefore imperative that the state should maintain an ownership stake of 51% in the PPP entity and hand over the management to the venturing partner.

Building a skilled labour force

Despite the high literacy rates of the population, Sri Lanka has a shortage in a skilled labour force. This is a paramount requirement if consistent FDI is to be attracted to the country. University education must enhance their enrolments into the fields of science and engineering where the birth of technology will dawn. This means significant investment into the University system, including the teaching standards. Government should participate the private sector in a more vibrant manner that they to play a significant part in the delivery of a quality breed of graduates, in addition to the fields of management and finance. ECTA agreement with India seems be the right move to draw skilled labour from neighbouring India in the event of a lapse of skilled professionals in the domains of Sri Lanka. 

Building a consistent policy framework 

This topic is one of the most widely talked about subjects, but the least implemented theme. Policy has shifted from each successive government with no clear long term consistency. This has repelled many FDI and other investments from the country. Trade policy should aim to shift from the present chaotic tariff structure to a more transparent form that liberalises trade. Investment driven policies backed by a faster approval process, consistent and predictable taxation and macroeconomic policy framework should be implemented.

Conclusion

Expectations of a possible referendum and local government elections may mean that there may be no deviation from populism measures in 2017. However, a step by step program must be implemented to create a new social policy system that has asset building as its central structure. Welfare state policies have been the backbone behind the advent of many Governments in past, but such policies along with many slow revenue generating capital investments have left the country with a mammoth debt burden. Tough decisions have now got to be made irrespective of the political impact it may have. The present Unity Government is the ideal platform to begin the path towards a development philosophy where each individual pays for their own social requirements. 

[The writer is the Managing Director at LTC Ltd., a financial and investment banking services firm operating in Sri Lanka. He has a BEng (Hons) in Chemical Engineering degree from the University of Nottingham, United Kingdom and a MBA from the University of Colombo. He is also a Chartered Financial Analyst. He can be reached via email on [email protected] or www.ltcsl.com.]